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World fears for Japanese economy

He was speaking on the opening day of a summit meeting of European and Asian leaders in London. His promise of action followed the yen's fall to its lowest level against the dollar in six years after an American credit rating agency revised its assessment of Japan's ability to pay its creditors.

The agency, Moody's, still gives Japan its top triple-A rating, but says the outlook is now negative rather than stable, in view of the exposure of Japanese banks to bad debts.

It says there is uncertainty about the ability of the Japanese authorities to agree on a policy to promote growth.

On Thursday, the chairman of the Sony Corporation said the Japanese economy was on the verge of collapse and could trigger a world recession. The Japanese Central Bank released a survey showing that Japanese executives were pessimistic about the country's prospects.

Economics correspondent James Morgan on the global implications

Corporate and market gloom

The Japanese financial markets initially plunged on the news. Japanese stocks slid more than 1% before recovering. The yen fell to 134.48 to the US dollar - its lowest level since April 1992.

The fear is that the influential Moody rating will affect the borrowing prospects of corporate Japan. Banks may be reluctant to lend more because of the large amounts of bad loans already on their books.

Japan owns half the world's savings and any moves to bring those funds back home could have severe knock on effects - not least for the US economy.

Economic indicators mostly bad

This week's news comes against a backdrop of a wider economic crisis throughout Asia and continuing stagnation at home.

• Growth is now likely to miss the official target of 0.1%. The economy could contract for the first time in more than 20 years.

• Confidence in the banking sector remains low following the collapse of Yamaichi Securities last November. It admitted concealing losses of more than $250m.

  The Japanese Ministry of Finance estimates bad debt held by all banks at ¥79 trillion ($590bn).

  The loans stem from property deals and speculative 'zai-tech' - literally 'financial technology' - made in the late 1980s.

  
  

• Property prices have crashed in major cities over the past five years. In Tokyo they are 70% below their peak.

• Consumer spending and confidence remains low according a number of recent surveys.

A series of government measures to kick-start the economy have not been considered imaginative enough to satisfy Japan's many foreign critics.

Many fear that without recovery in Japan, the rest of the region will remain in an economic slump.

Relevant Stories

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