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Sunday, September 27, 1998 Published at 13:49 GMT 14:49 UK

Business: The Economy

Japan faces a year of recession

The outlook remains gloomy

The boss of Japan's Economic Planning Agency, Taichi Sakaiya, has warned that the country may have to struggle through a full year of economic recession.

Speaking on NHK television, Mr Sakaiya predicted that the economic statistics from July to September would be even worse than in the previous quarter.

Until now the government has maintained that Japan's economy will grow by 1.9% in real terms in the fiscal year ending in March 1999.

[ image: Prime Minister Keizo Obuchi and Finance Minister Kiichi Miyazawa have not much reason to laugh]
Prime Minister Keizo Obuchi and Finance Minister Kiichi Miyazawa have not much reason to laugh
But now Mr Sakaiya believes that it "is very possible for the economy to shrink for four quarters in a row."

"Some cite the government's current forecast of 1.9% growth and say it would be minus 1.9% instead of plus 1.9%. I don't think it would be that bad but it could be close to that."

More bad data to come

A leading business newspaper, Nihon Keizai, reported on Saturday that the Economic Planning Agency would forecast an economic contraction this financial year of 1.6% to 1.8%.

This would be Japan's worst economic performance in five decades.

Business leaders are gloomy too. About 60% of them think that the domestic economy is worsening and will not improve before the second half of next year, according to a new poll published by the Asahi Shimbun newspaper.

And on Thursday the government will publish the so-called Tankan survey, the most comprehensive quarterly look at Japan's economy. The data are expected to confirm that the country is suffering from a deep slump.

[ image: Traders and investors have trouble digesting the economic data]
Traders and investors have trouble digesting the economic data
Market watchers like Keiko Kondo of Merrill Lynch Japan are convinced that the Tankan survey will paint a bleak picture, "but the question is how bad it will be."

Susumu Kato, chief economist at Barclays Capital Japan, says "the business environment could hardly be worse for Japanese companies."

If the situation is truly dire and if the United States Federal Reserve fails to cut interest rates this Tuesday, then share prices on the Tokyo bourse will be in for yet another hammering.

Medium-term optimism

Japan is facing a multitude of problems: the economic chaos in Asia, a banking system crumbling under the weight of bad debts, depressed consumer spending and falling capital investment by Japanese companies eager to cut costs.

Nonetheless, the country's chief economic forecaster believes that the government's spending programmes, designed to kick-start the economy, will make an impact soon.

Mr Sakaiya said he expected an economic recovery within the next year or two, and that Japan's stock markets would improve by the second quarter next year.

Stock market analysts are less optimistic.

Yasuo Ueki of Nikko Securities points out that investors will be "reluctant to aggressively buy up shares" as long as the government fails to solve the problems of the financial system.

On Sunday, government and opposition parties were still trying to hammer out the details of how to save the ailing banking sector.

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