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Last Updated: Tuesday, 29 April, 2003, 08:08 GMT 09:08 UK
'Worst is over' for Japan
Motoshige Itoh
Mr Itoh says signs of a recovery are visible

Japan's economy is over the worst, and a steady recovery now looks inevitable, a leading Japanese economist has told BBC News Online.

Motoshige Itoh of the University of Tokyo, one of the most influential voices for reform in Japan, said the modest remedial measures put in place by the government may already be paying dividends.

"There is not much more the government can do - now, market forces are taking over," he told BBC News Online at a meeting of the Organisation for Economist Cooperation and Development (OECD) in Paris.

But the recovery could take many years, and may be hampered if the yen remains strong, Mr Itoh warned.

Political pressure

Analysts have often complained that the political will for serious reform is lacking in Japan.

But Mr Itoh said the new economic team brought in by Prime Minister Junichiro Koizumi - including Bank of Japan governor Toshihiko Fukui and Economy Minister Heizo Takenaka - have communicated a "strong commitment " to reform.

"Mr Koizumi has been careful not to be too aggressive," Mr Itoh said.

"But he has shaken up the equilibrium of the financial world, and has left banks little option but to start restructuring."

Back out of bonds

There are still a few things that government can do, Mr Itoh argued.

The key policy now is to persuade nervous Japanese consumers to shift their money from the bond markets into share and property investments.

The Bank of Japan, which has tended to pour its own money into bonds, should set a lead here.

Over-strong bonds, Mr Itoh argued, have allowed government to borrow more and more money, while draining capital from the real economy.

At the same time, some of that government wealth could be return to the economy by judicious tax cuts.

Green shoots

Mr Itoh said signs of a recovery were already visible.

The severe crisis in bank balance sheets has seen corporate restructuring proceed at a faster pace than some anticipated.

Japanese banks hold the purse strings at most of Japan's big companies, and have been surprisingly tough in their demands for fiscal rigour.

Traditionally, Japanese companies are far more dependent on soft bank loans than their counterparts in Europe or the US - something that may now be changing.

Although many parts of the real economy are in poor shape, some of Japan's biggest firms - notably Honda, Sony and Toyota - have been turning in record profits.

Wait for it

But a full recovery will take time, Mr Itoh argued.

"One should not expect too much.

"Japan's economy enjoyed very, very rapid growth from the 1950s to the 1980s, a period that left it unbalanced in many ways, so serious structural changes are necessary if it is to get back to full health."

And the persistently strong yen, buoyed against all expectations by the dismal performance of the dollar, could also make things difficult for Japanese exporters, Mr Itoh said.

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