By Sandra Sugawara
Washington Post Foreign Service
Saturday, June 13, 1998; Page A01

TOKYO, June 12 – Japan's economy is shrinking, authorities here said today, officially confirming a recession in the world's second-largest economy.

The news shakes global hopes that Japan, Asia's one-time economic engine, soon will regain its steam after seven years of stagnation and pull other nations in the region out of their financial turmoil.

It is the first recession in 23 years here. In the first three months of this year, Japan's economy contracted sharply, at an annualized rate of 5.3 percent, the Economic Planning Agency said. Japan's economy shrank by 0.7 percent for the fiscal year ended March 31, the first full-year drop since 1975.

Other signs of economic pain are abundant. Corporate bankruptcies are surging, up 37.5 percent in May, compared to the same month last year, according to figures released today by Teikoku Databank research group.

The yen, which had already lost 40 percent of its value in the past three years, slid sharply this week, ending the week at 144.72 yen to the dollar.

Stock and currency markets across Asia have been hit hard. South Korea's stock market, for example, dropped 8.4 percent today, its lowest level in 11 years.

Japan's unemployment rate has hit 4.1 percent, just a hair below the U.S. rate of 4.3 percent, a startling reality in a country where lifelong employment has been the rule.

Indeed, the unemployment rate among adults males in Japan is higher than that of adult males in the United States.

"This shows unemployment in Japan is getting very serious, and I expect it to continue to get worse," said Robert Alan Feldman, an economist from Morgan Stanley.

Japan's deepening economic funk is straining already fragile financial structures and increasingly hurting ordinary people's lives.

"This is very difficult," sighed a 51-year-old architect as he flipped through the folders in a Tokyo unemployment office. Neatly dressed in a gray suit and polished black shoes, he wearily surveyed the jobs available – cooks, delivery man.

More than two months ago, the construction materials company where he worked as a researcher told him to take early retirement along with hundreds of his colleagues. In the past, the company had kept employees, even when it had suffered losses, said the architect, who would give only his first name, Kazuo. "A few years ago, it never occurred to me this could happen," he said quietly.

Personal bankruptcies may top 100,000 by the end of this year, if filings continue at their current pace, up from 70,000 last year.

Bankruptcy attorney Kenji Utsunomiya, working late in his office tonight, said he's been swamped with phone calls and visits from bleary-eyed, exhausted people who cannot pay their debts.

Utsunomiya hired a new attorney and two part-time assistants to handle the increase in cases. In the past, most clients were poor, he said, but now he's getting many from the middle class.

"Sometimes they come in and their entire family looks like they are suffering a nervous breakdown," Utsunomiya said.

Suicides here jumped 18 percent last year compared to the year before, to 3,556, the National Police Agency reported.

Last summer, when the Asian crisis the suffering was largely confined to the financial elite in nations with much smaller economies such as South Korea and Indonesia. Southeast Asian tycoons watched stock market fortunes shrink. High rolling stockbrokers in Thailand auctioned off their Mercedes and condos. South Korean bankers worried about losing their jobs.

Now the turmoil is more widely felt and is finally sinking in on those in Japan. Nowhere is the worry deeper than in the banking industry.

Analysts estimate banks already have roughly $600 billion in bad loans on their books. The worsening economy means "that debts are accumulating faster than banks can write them down," said Matthew Poggi, an economist with Lehman Brothers.

Taku Yamasaki, the policy chief of the ruling Liberal Democratic Party, recently declared that there will be no bank failures in the short term. But financial markets in Japan and elsewhere in Asia remain jittery. Ratings agencies continue to downgrade the credit quality of Japan's banks.

Nippon Credit Bank had to take the unusual step of asking life insurance companies that supply much of its working capital to ease terms on their loans. Some life insurers agreed, but a few rejected the request.

Another bank thought to be having financial troubles, Long-Term Credit Bank, said it plans during the next two years to "reconsider" unprofitable corporate loans it has made for 2,500 of its borrowers – about one-third of its corporate clients – meaning it probably will try to call in the loans and refuse to make new ones.

Already many banks are putting the squeeze on customers, according to small and medium-size companies.

Standing in his cozy Chinese restaurant in trendy Aoyama, one restaurant owner who asked that his name not be used, explains that for 20 years he had no trouble borrowing money from his bank to buy property and run his businesses. "But now they refuse to give loans, and I feel really upset about this," he said. "They ignored the fact that I was a good customer, I was never overdue on any loan payments."

His annual loan payments are hefty – more than $200,000 a year. That creates a cash crunch for his business during certain periods. In the past, the bank would give him a short-term loan to get through those times, but now he must get the loans from a special program run by the local government.

Japan's economy is twice as large as the rest of Asia combined, so its problems have reverberated through the rest of the region.

Countries such as Thailand and South Korea hoped to export products to Japan, raising cash to grow their way out of their economic troubles. But Japanese imports from Asia were down by 14 percent in the first three months of this year, according to Andy Xie, a Hong Kong-based economist with Morgan Stanley.

Furthermore, Japanese banks, the largest source of foreign capital in the rest of Asia, have been pulling back at a time when other Asian banks are too weak to lend, say analysts.

The result has been a downward spiral unimaginable only a year ago.

In South Korea, decades of robust growth had produced a large, educated middle class of people who bought gourmet food and designer clothes. Now homeless people congregate in parks. Crime has risen and about 25 people a day commit suicide, mostly because of economic problems, according to prosecutors there. The country has been torn apart by strikes and a battle to close down the unprofitable subsidiaries of the chaebols, the large family-run conglomerates that have dominated South Korea's business.

In Thailand, the unemployment rate could top 7.3 percent, according to the Japan Research Institute. The government is planning to set up dozens of soup kitchens throughout Bangkok to feed the unemployed.

Tens of thousands of struggling and angry farmers are expected to descend on Bangkok on June 24, to demand that the government agree to a moratorium on debts to the agricultural bank and coops. Companies large and small say they are unable to pay the soaring interest rates on loans.

In Indonesia, long-time President Suharto was forced out of office, in part because of the economic unrest. Student protests continue, with the unemployment rate expected to soar to 13.2 percent and the economy expected to contract by about 15 percent this year.

Attacks on ethnic Chinese, who control much of the country's commerce, and efforts to dismantle the empire of the Suharto family mean that social and economic turmoil here could continue for years.

Hong Kong has also been hit. Financial institutions, real estate companies and restaurants have gone bankrupt.

Banks have had to maintain high interest rates to keep money from fleeing overseas.

Special correspondent Akiko Kashiwagi contributed to this report.