By Sandra Sugawara
Washington Post Foreign Service
Friday, October 3, 1997; Page G03

TOKYO—Business confidence here has plummeted, consumer confidence has done a nose dive, the approval ratings of Japanese Prime Minister Ryutaro Hashimoto have fallen sharply, and Japan's trade surplus is not going to decline any time soon.

That's the news from the Bank of Japan, which this week released its "Tankan" quarterly survey of business confidence, and from a number of other recently published statistics and polls. Despite assurances from political leaders that the country's now seven-year-old economic downturn is near an end, the numbers keep pointing the other way.

The central bank's survey found that business leaders, whether at large manufacturers or small service companies, have grown increasingly pessimistic about their firms' prospects. Other government reports, released Tuesday, said key indicators such as housing starts, industrial production and retail sales fell in August.

Earlier statistics revealed that Japan's economy shrank 2.9 percent during the April-June period, its worst performance in 23 years.

It's all bad news for the United States as well. Washington wants Japan's economy to warm up, fueled by domestic demand that would draw in a wave of imports and reduce the country's trade surplus. But so far, Japan seems able to stoke its economy only through exports.

Hashimoto's falling popularity, caused by an unsuccessful attempt to appoint a politician convicted of taking bribes to his cabinet, also is a concern in Washington. It has raised worries about his ability to win legislative support for his deregulation efforts, which U.S. officials see as key to opening Japanese markets to U.S. products.

Together, these factors have created a crisis of confidence for people such as Fumishige Saito, a 49-year-old manager at an insurance company who was interviewed on his way to lunch this week. He said he will wait another year to buy a car, and that he goes out to dinner half as much as he used to, despite the fact that he hasn't lost his job. "I just don't think the economy is doing well," Saito said.

Mamoru Suzuki, 58, a computer company executive, said he is delaying work on his house, although he has not suffered a pay cut; Takashi Higure, a 30-year-old government employee, said his concerns about the economy are causing him to put off buying a car.

Fed up with the downturn, Japanese business executives are pressuring the government for tax breaks and other changes that they say would stimulate the economy. Top officials of Japan's largest business group, the Keidanren, met Tuesday with Ministry of International Trade and Industry officials to say they were exasperated with the continually upbeat assessments mouthed by government leaders.

"I hardly hear that domestic demand is getting any better," Hiroshi Saito, chairman of Nippon Steel Corp., told the officials. "It is getting worse day by day in some industries."

"The pressure is immense for the government to come up with a stimulative package" that would get the Japanese economy moving again, said Mineko Sasaki-Smith, chief economist at Credit Suisse First Boston's Tokyo office.

In the United States, executives in some industries, such as auto manufacturing, have been urging U.S. officials to try to influence currency markets to make the yen stronger. That would make Japanese exports to the United States more expensive and American goods here cheaper.

"The danger is, if you do that, you kick away the last support the Japanese economy has, and then you get a recession, which will result in an even bigger trade surplus," said Russell Jones, chief economist for Lehman Brothers in Tokyo. "You also expose the Japanese banking sector to more risk at a time when the Asian banking sector is a mess."

The United States has pushed Japan hard on deregulation. But many economists here caution that Washington should be prepared for the fact that reforms probably are making Japan's economy worse before they make it better and more open. That's the good news in the numbers, they say -- proof that reforms are taking hold.

For instance, since July, the Tokyo Stock Exchange's Nikkei index has dropped by more than 11 percent. On Thursday, in the wake of the Tankan report, it closed at 17,455.04 -- a decline of 387.12 points, or 2.17 percent.

Widespread investigations of the securities industry over alleged payoffs to racketeers have contributed to the loss of confidence in the market. But the probes are intended to rid the securities industry of its allegedly costly relationship with criminals, ties that are affordable for protected cartels but not for firms competing in a deregulated environment.

With investigations against all of Japan's "Big Four" securities houses underway, the Japanese firms have been rapidly losing business to foreigners.

One of the most pessimistic sector outlooks in the Tankan survey was for retailing, and that, too, is due to restructuring, said Jones.

"A number of small shops are being wiped out, because the government is deregulating. People look next door, and they see that the shop there has just gone under, and they think 'maybe that's me next.' In two or three years, you will have a much more efficient retail sector that will allow more imports in. But the immediate impact is painful," said Jones.

Washington Post special correspondent Akiko Kashiwagi contributed to this report.