Economist predicts recession for Japan


Satterwhite says the export driven recovery under way in Japan will flag when the yen strengthens again

By Alex Frew McMillan

HONG KONG, China -- Japan's jobless rate will crest at 6 percent over the next 12 months, according to a prominent economist, and the odds are high that the world's No. 2 economy will sink back into recession in 2002.

"The chances of Japan going into another recession are more than 50 percent within this year," David Satterwhite, managing director of the Economist Corporate Network, told CNN on Tuesday.

"Negative growth in the next two quarters is likely," he added.

The predictions came as a bank selloff sent Japan's stock market plummeting to 19-year lows. (Full roundup)

Big banks dominated the drift, locked in a spiral with the broader market due to banks' large stock holdings.

Banks are due to close the first half of the business year at the end of this month. That is prompting them to sell stock -- leading to declining share prices and a fall in financial stocks.

Lack of reform at root

Satterwhite said bank stocks are also suffering from a lack of substantive reform. "They have been punished for not cleaning up their act," he said.


The economist was speaking in Hong Kong as part of a regional forecast for Asian growth prospects

The watchdog Financial Services Agency (FSA) averted a financial crisis in March. But critics say the reprieve was temporary and the agency has not done enough to push structural change.

First on the list for many overseas pundits is dealing with problem loans.

Investment bank Goldman Sachs estimates that 12 percent of Japan's 610 trillion yen in bank loans are to companies that are already bankrupt -- much higher than the 2 percent official estimate.

Another 16 percent are at risk of bankruptcy, the bank says, not the 3 percent official rate. That will take years to address.

"Turning around the severe structural problems of the Japanese economy will take a few years of sustained effort," Satterwhite said.

Recovery not to last

Japan said last week it emerged from recession in the second quarter, in the midst of a tentative export-driven recovery, which boosted large manufacturers. (Full story)

But a strengthening currency is threatening that growth. The yen drove as low as 115 to the U.S. dollar in the second quarter. It ended Asian trading around 118 on Tuesday.


Koizumi has a 50 to 70 percent chance of staying in power for another two years, Satterwhite believes

Satterwhite, who was speaking in Hong Kong on the sidelines of the Economist Corporate Network's third quarter forecast for Asia, expects the yen to strengthen again, back to 115 or even 110 in the next six months.

That removes the one prop that's supporting Japan -- exports. U.S. prospects are lackluster, which hurts Asian exports and, in turn, Asian demand for Japanese goods.

The jobless rate will rise above the 5.5 percent record it set in December, he believes. It remains near its record, at 5.4 percent for July. (Full story)

'Too early' to write off Koizumi

Despite those gloomy prospects, Satterwhite is still bullish about the prospects of reform from Prime Minister Junichiro Koizumi. Many experts believe his reform charge has not lived up to his promises.

Satterwhite thinks there is a 50 percent to 70 percent chance Koizumi will stay in office another two years.

"I'm bullish on the prime minister surviving and achieving more," he said. "It is too early to write off Koizumi."

The leader's voter support ratings rose to 51 percent, according to a poll from the Asahi Shimbun conducted this weekend, up from 43 percent a week ago.

Koizumi is widely expected to shuffle his cabinet before the end of the month. He may choose reform-minded politicians that can help push through his plans for state-owned corporations, including the post office and four sprawling road companies.

Ironically, the poor economy may benefit Koizumi -- and the chance of reform in Japan. Satterwhite noted that more economic woes could dissuade potential rivals from competing for his post.