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Saturday, 2 February, 2002, 02:37 GMT
'No quick fix' for Japanese economy
Panel of economic forum participants
Japan officially entered recession late last year
David Schepp

The United States is primed to lead the world out of recession with robust growth returning to the world's largest economy by mid-2002.

But while the US may leave its economic doldrums behind quickly, Japan will continue to experience negative growth unless much-needed reforms are put in place, according to a leading economist speaking at the World Economic Forum (WEF) in New York.

"The big problem is the failure - so far - to deal comprehensively and effectively with the structural problems of [Japan's] banking system," said C Fred Bergsten, director of the Institute for International Economics USA.

The failure to do so has eroded investor and consumer confidence, and dragged down the Japanese stock market.

"The situation is getting worse," Mr Bergsten said.

Dire situation

Japan should declare a bank holiday - shut down the banking system - and close about half of the banks, because half of the banking system is insolvent, he said.

Speaking on Japan's behalf, Haruhiko Kuroda from the Ministry of Finance admitted that his country needed to implement changes that would lead it out of the economic doldrums it had experienced for more than a decade.

"Many argued that Japan will structure reforms that are necessary and inevitable," Mr Kuroda said, speaking after he participated in a brainstorming session about restoring global growth.

"In particular, dispos[ing] of underperforming loans in the banking sector is absolutely necessary," Mr Kuroda told reporters.

Negative growth

In December, Japan was deemed to have officially entered recession after experiencing negative growth in the July through September quarter.

Figures showed that Japan's gross domestic product (GDP) shrank by 0.5% in the July to September period compared with the previous three months, giving an annualised decline of 2.2%.

For 2001, Japan's Economy Minister Heizo Takenaka warned in December: "There is much possibility that the October-to-December figures could also be severe".

Japan could experience negative growth of minus 2-3% or even more, depending on what Japan does, Mr Bergsten said.

But according to Mr Bergsten, if Japan does impose the much-needed structural reforms, confidence would return to Japan's stock and financial markets.

Within a year strong economic growth would return, Mr Bergsten said, making up for the 10 years of stagnation that had created a "very large output gap".

The other benefit Mr Bergsten noted would be that such policies would "strengthen the government of Prime Minister Junichiro Koizumi even though it would cause a bit more difficulty in the short run".

"It would bring to an end the decade of stagnation in Japan," he said.

See also:

07 Dec 01 | Business
Japan falls into recession
04 Dec 01 | Business
OECD gloomy over Japan
31 Oct 01 | Business
Japan's fading economy
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