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Friday, 31 May, 2002, 05:00 GMT 06:00 UK
Analysts drop Japan to 'Latvia status'
A yen information board in Tokyo
A topsy-turvy picture has emerged of Japan's economic health
Ratings agency Moody's Investors Service has downgraded government bonds issued by Japan - the world's second biggest economy - to the same status as those from Latvia and Poland.

Moody's researchers blamed the downgrade, by two notches, on concerns over the government's ability to solve Japan's economic malaise.

"The Japan government's current and anticipated economic policies will be insufficient to prevent continued deterioration in Japan's domestic problems," Moody's said.

The levels of debt the government has run up, after years of attempting to kick-start economic revival through large infrastructure projects, meant it was testing new economic frontiers, Friday's report said.

"Japan's general government indebtedness... will approach levels unprecedented in the post-war era in the developed world, and that as such Japan will be entering 'uncharted territory'."

Jobless data

The news came as official data showed that the number of unemployed Japanese workers hit 3.75 million last month, up 270,000 from a year before.

The figure represented the 13th successive monthly rise in unemployment, and defied a more optimistic outlook by many analysts, including those at the Bank of Japan, over the country's economic prospects.

But many economists restated on Friday that they expected an export-led recovery to ease unemployment problems.

"We believe in general the Japanese economy hit the bottom in the first quarter of this year," Junichi Makino, senior economist at Daiwa Institute of Research, said.

"It usually takes three to four quarters for unemployment rate to come down after the overall economy bottoms out," he added.

"We believe, by the end of this year, we will start seeing clear signs of the unemployment rate coming down."

Minister hits back

Many analysts also questioned Moody's decision to put Japan sovereign debt to A2, the same level as Greece.

Peter Morgan, senior economist at HSBC Securities, pointed to the level of consumer savings as evidence that Moody's case was overblown.

"Japan still has quite a high savings rate so that means the fiscal deficit is easily covered by domestic savings," Mr Morgan said.

And the decision was slammed by Japanese Finance Minister Masajuro Shiokawa.

"They're doing it for business," Mr Shiokawa said.

"Just because they do such things we won't change our policies."

'Boxcar' economy

Yet Japan's future economic health is still viewed with concern by many observers, including US Treasury Secretary Paul O'Neill, who earlier this month warned that the economy risked becoming a "boxcar" on the global racetrack.

And on Thursday, the Institute for International Economics warned that Japan could yet plunge into economic crisis.

"After more than a decade of economic stagnation and minimal structural change, Japan stands on the brink of outright financial crisis," said Adam Posen, senior fellow at the institute.

"The Japanese economy is likely to tumble into crisis some time before... September."

Government 'inaction'

Mr Posen said that the government of Prime Minister Junichiro Koizumi had failed to tackle the failings of its predecessors since it took office two years ago.

"No decisive action has been taken," he said.

But he said that crisis could be avoided by tackling problems such as Japan's debt-laden banks.

"A comprehensive policy package of bank closures and recapitalisation, money-financed Bank of Japan purchases of long-term government bonds and replacement of public works spending with tax cuts could still save the Japanese economy."

The BBC's Lesley Curwen
"There is a deadline looming where there could be a crisis point"

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