IMF warns Japan recovery could be brief


The IMF says Japan's recovery could be short-lived unless banking and corporate reform is tackled

By Geoff Hiscock
CNN Asia Business Editor

WASHINGTON (CNN) -- The International Monetary Fund has again warned Japan to tackle banking and corporate reform or face a recovery that is short-lived.

In its latest outlook on the world's second-largest economy, the lending body says that even with strong growth in the first quarter of 2002, it expects Japan's real gross domestic product (GDP) to shrink half a percent for the full year.

The IMF's directors say there are still "considerable downside risks" to economic activity in Japan.

"They were concerned that the recovery is likely to prove short-lived unless Japan's deep-seated structural problems in the bank and corporate sectors are urgently and comprehensively addressed," the IMF said in the report, released in Washington Thursday.

The IMF view coincides with the Japanese government's own warning that the plunge in stock prices and a weakening U.S. dollar is putting more stress on the global economy.

Situation 'severe'


Prime Minister Koizumi's commitment to structural reform is welcome, the IMF says, but it warns there is no room for complacency

A report Thursday by Economy Minister Heizo Takenaka said the situation for the Japanese economy remains "severe" but there are signs of recovery in some sectors.

Earlier this week, the Cabinet Office released the June diffusion index of leading economic indicators, showing it was 70 on a scale of 100.(Full Story)

It was the sixth straight month the forward indicator has had a positive reading, suggesting brighter times ahead.

But data released Thursday by the Bank of Japan showed wholesale prices in July stayed flat, weighed down by depressed consumer spending.(Full Story)

Consumers are reluctant to spend because prices have fallen every month for the past 33 months, adding to the deflationary pressure.

In June, Japan reported its economy grew 1.4 percent in the March quarter from the previous quarter. That equated to an annualized rate of 5.7 percent, and followed three straight quarters of economic contraction.

One-off spike?

But some analysts have suggested the March figure may be a one-off spike, and that the June quarter -- due for release in early September -- could see a return to contraction.(Full Story)

Certainly, the IMF view is cautious.


As the nation enjoys summer, there is doubt in Japan over whether the economy has grown in the June quarter

It says the sharp increases in private consumption and public investment in the March quarter are unlikely to be sustained for the rest of the year "owing to the uncertain unemployment outlook and an expected withdrawal of the fiscal stimulus".

While it says exports will likely remain "robust", the external contribution to growth will taper off as imports increase.

"A modest cyclical recovery in business investment is not expected before late-2002," it says.

But other observers, such as Tokyo-based chief economist for ING Securities Richard Jerram, believe a cyclical recovery is developing in Japan that will lead to growth of 0.6 percent in the year to next March.

In his macroeconomic forecast last month, Jerram said that barring a shock from external demand, "around two to three years of growth in Japan seems likely".

Must avoid complacency

The IMF says Japan must avoid complacency "at all costs", as this would only serve to prolong the country's decade of stagnation.

It welcomed the repeated commitment to structural reform given by Prime Minister Junichiro Koizumi's administration.

But it singled out Japan's massively indebted banks for attention.

"Directors noted that banks, which own the bulk of corporate excess leverage, must take the lead in agreeing restructuring plans with their potentially viable debtors, push non-viable firms into liquidation, and dispose of unwanted loans to third parties," it said.

Last week, the Financial Services Agency reported that non-performing loans held by Japanese banks at the end of March hit a record high of 52.4 trillion yen ($437 billion), up 9.5 trillion yen from a year earlier.