IMF sees 0.5% shrinkage for Japan


Japan's economy may grow 0.2 percent next year, the IMF says

By Geoff Hiscock in Sydney
CNN Asia business editor

TOKYO, Japan (CNN) -- Japan's uncertain economic outlook for the rest of this year means its GDP will likely shrink by 0.5 percent in 2001, the International Monetary Fund says.

This is a more optimistic outlook than that of some analysts based in the region, who see Japan's economy contracting by up to 1.5 percent this year as slumping U.S. consumer demand hits Japanese exporters.

The big unknown remains the impact of the September 11 terrorist attacks in the U.S.

The IMF says it is too early to say, but analysts such as IMA Asia's Richard Martin believe it will weigh heavily on Japan's insurance sector, for example.

He calls Japan the big risk-factor for the region because of its poor resilience to corporate, financial and political shocks.

"The risk is that Japan moves from its position of having a much-diminished positive influence on the region to having a strongly negative impact," he noted in a risk assessment last week.

Japan's problems -- including the bad loans weighing on its banks, depressed consumer confidence, rising unemployment, manufacturing over-capacity -- have been well documented by the IMF and other economic observers in recent years.

Its disappointing performance as the world's second largest economy -- it is heading for its fourth recession in a decade -- has prompted calls for urgent action from key allies and trade partners, including the United States.

About 30 percent of Japan's exports now go to the U.S.

Bush urges Koizumi to act

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During a meeting in Washington this week, U.S. president George Bush urged Japan's Prime Minister Junichiro Koizumi to try to get his country's economy moving and help the world avoid a global recession.

Koizumi, who came to power in April on a program of wide-ranging structural reform, pledged "appropriate action".

But despite the mandate of a high approval rating early in his administration, Koizumi has yet to deliver the decisive steps most analysts see as a prerequisite to recovery.

The most pressing is widely regarded as cleaning up Japanese banks' bad debts, including the risky "gray loans" that are still being made.

Significant downside risks

Even so, the IMF said Japan could eke out growth of 0.2 percent next year, pointing to "some energy" among the Koizumi administration to address its problems.

It warned that significant downside risks remained in Japan, linked both to a slower global recovery and the progress of its domestic structural reform.

The IMF growth forecasts, released in Washington late Wednesday, were made before the September 11 terrorist attacks on the United States.

IMF officials told a press briefing that it was too early to give concrete figures for the impact of the attacks, but there was no doubt it was having a negative effect in many parts of the world.

Ken Rogoff, IMF research director and author of the World Economic Report October 2001, said the fund was optimistic that Japan's problems were now understood and there was momentum towards fixing them.

"I think this [0.2 percent] low level of growth is certainly not unrealistic," he told the press briefing.

Impact on rest of region

The IMF also warned in its economic outlook of the impact a weaker Japan would have on East Asia.

It said that while the region had become less reliant on trade with Japan in recent years, the linkages "remain significant".

It said about 12 percent of East Asian exports go to Japan, and about 20 percent of East Asian imports come from Japan.

"A slowing Japanese economy would reduce trade turnover with regional partners, thus impacting their growth outlook," it said.

Indonesia had the most significant trade links with Japan (about half of it in the petroleum sector), followed closely by China, which sells mainly lower-end goods to Japan.

It said Hong Kong and Singapore had the lowest reliance on Japan.

But these two economies also are likely headed for recession this year, along with Taiwan and Malaysia, according to Martin of IMA Asia.

The IMF also warned that a further decline in the depressed Japanese stock market could push regional equity markets down, particularly in Hong Kong.

In the banking sector, Thailand had the highest exposure to Japanese bank lending, it said.