Japanese anxious on economy after grim reports

China overtook Japan as the world's second-largest economy on Monday, after Japanese growth slowed down sharply in the second quarter.
By Chico Harlan
Washington Post Foreign Service
Thursday, August 26, 2010; 11:53 AM

TOKYO - Even by the standards of a country that has spent 20 years fretting about its economy, these are especially worrisome times in Japan. Several recent benchmarks - a succession of bad and worse news - have prompted calls for rare government intervention.

Japan has been suffering from the effects of deflation since the collapse of its bubble economy almost two decades ago, and the latest economic news offers little hope for recovery anytime soon. The yen is now strengthening, slowing export growth. An aging population is reducing the Japanese workforce. Diminished bank lending has made it tougher for Japan to find long-range options to end the doldrums.

Taken together, Japan has new reason to suspect that its economy, surpassed last week by China as the world's second largest, faces painful months ahead. It seems likely to be a period when a powerful yen pins down Japanese exports, undermining hopes of the financial recovery that seemed possible only months ago. Japan's economy grew 4.9 percent in the first quarter, but just 0.1 percent in the second.

On Wednesday, Prime Minister Naoto Kan held an emergency meeting with a pair of top lieutenants, including Finance Minister Yoshihiko Noda, to discuss possible government action to curb the yen's rise. Only a day earlier, the yen, measured against the U.S. dollar, hit a 15-year high. In tandem, the Nikkei stock index hit a new low for the year, falling below the 9,000 mark.

Investors and economic experts clamored for countermeasures, including a possible $20 billion stimulus package, and said Kan is responding too slowly.

Some say Japan's indecisiveness is linked to divisions in its ruling but weak Democratic Party, which faces Sept. 14 elections to select its next leader - a de facto runoff to become Japan's prime minister. On Thursday, Kan's rival, Ichiro Ozawa, announced his intentions to run for the Democratic leadership spot.

"There's a leadership vacuum between now and September, and that contributes to the problems," said Takatoshi Ito, an economics professor at the University of Tokyo.

Though Japan hasn't intervened with the foreign exchange market since 2004, finance chief Noda indicated that the government seemed increasingly willing to do just that. "I believe we should take an appropriate response when necessary," he said Wednesday.

The Bank of Japan might opt for its own emergency steps, including measures that ease funding for lenders.

On Wednesday the yen pulled back slightly from its Tuesday 15-year high, when it measured 83.60 per dollar. But fears about Japan's economy were compounded by the latest batch of statistics, released by the government, indicating that export growth in July slowed for the fifth consecutive month. Because of deflation-level prices, consumers are less likely to spend on purchases that they believe will become cheaper in the future.

As the nation depends less and less on its own consumers, it has become increasingly reliant on export strength. A high yen makes Japan's exported products costlier in overseas markets. Toyota has estimated that it loses 30 billion yen (about $350 million) for every 1 yen gain against the dollar.

According to the Bank of Japan, manufacturers were expecting the yen to average 90 per dollar in the last part of 2010.

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