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Thursday, November 19, 1998 Published at 16:00 GMT

Business: The Economy

The rocky road to recovery

Head to head: Bill Clinton and Keizo Obuchi: will Japan recover?

US President Bill Clinton says nothing is more important to restoring stability and growth in Asia than efforts to kickstart Japan's economy.

His argument is straightforward: "If Japan is very strong, that brings back Asia."

The not-so-straightforward part is how to bring about Japan's recovery from its worst recession since World War II.

[ image: The crisis in Japan has hit financial markets all over the world]
The crisis in Japan has hit financial markets all over the world
Japan has been an engine for world growth in previous decades and if it fails to recover there will also be dire repercussions for the UK, US and other leading economies at risk of financial fallout from developing nations.

Asia's problems have also created a crisis of confidence in the world's financial system which has left many economies on the brink of disaster.

Government recovery plan

Japanese Prime Minister Keizo Obuchi is pinning his hopes on an economic stimulus package of more than 23 trillion yen ($189bn) unveiled earlier this week.

Central to the plan is ¥10 trillion ($82bn) for new public works projects and ¥4 trillion ($33bn) in income tax cuts.

Corporate taxes will also be cut sharply.

One of the government's more controversial ideas is to give shopping coupons to 35m citizens in the hope that it will spark a consumer boom.

The elderly and families with young children will be given vouchers worth ¥700m ($5.8bn).

But consumers continue to save, not spend, as the magnitude of Japan's economic predicament has become clear.

More tax cuts?

On an optimistic note the promise of co-operation between Japan's ruling Liberal Democratic Party and the opposition Liberal Party has raised hopes of a smooth passage for the package through parliament and sparked speculation about a suspension of Japan's sales tax.

[ image: Traders and investors are yearning for stability]
Traders and investors are yearning for stability
A decision to hike this consumption tax from 3% to 5% in 1997 has been identified as a major factor in bringing on Japan's recession after having a devastating effect on consumer confidence.

However Mr Obuchi is convinced his new measures will ensure Japan's economy grows by 2.3% within the next two years.

During the US president's trip to Japan, he said: "I would like to convey to President Clinton Japan's strong resolve to return the economy to positive growth in fiscal 1999."

Bad debts galore

US and Japanese leaders also announced at the Apec meeting of Asia-Pacific leaders in Malaysia this week plans to offer more than $10bn in aid to struggling Asian nations and banks.

But some financial experts remain sceptical that the packages still do not go far enough.

"We need growth which is led by the private sector, not by fiscal spending," said Yoshito Sakakibara, Senior Economist at Goldman Sachs.

Japan's economy is expected to shrink markedly this year and unemployment will rise beyond its already record levels.

The Organisation for Economic Co-operation and Development is forecasting growth of only 0.2% forecast in 1999.

In 1997, Japan's economy shrank by nearly three-quarters of 1%.

Banking still weak

[ image: Japan is desperate to get consumers spending]
Japan is desperate to get consumers spending
The OECD says the major risk in Japan remains the restructuring of the debt-laden banking sector, which could further impede recovery and spill over into other economies.

That could also cause weakness in the yen, putting presssure on China to devalue its currency and spawning another round of the Asian currency crisis.

Japan faced a ¥60 trillion ($490bn) bill last month to help the nation's banks write off massive bad loans and restore the ailing financial system.

The collapse of the banking system has put pressure on companies who are finding it difficult to obtain credit, thus pushing the economy further into recession.

Company profits slashed

The 1997 record of ¥14 trillion in bankruptcy debts is expected to be exceeded this year and corporate profits have slumped 30% compared to last year.

Adding to the chorus of gloomy voices is the head of Japan's Economic Planning Agency, Taichi Sakaiya.

He said last month that there were strong concerns that the Japanese economy would contract for a third successive year.

An array of depressing statistics that Japan will have to overcome if it is to avert the threat of a global recession.

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