Japan's economic woes continue

Japan's economic and stock woes worsened Friday

By Alex Frew McMillan
CNN.com Senior Writer

TOKYO, Japan -- Economic data released Friday provided fresh evidence that Japan is in a serious slump.

But the embattled Japanese government took the first steps toward long-needed bank reform.

The jobless rate in Japan, the world's second-largest job market, remained at a record high in January. The Tokyo consumer price index also dropped.

"Today's data confirmed that the Japanese economy began to deteriorate in the second half of last year," Tomoko Fujii, economist at Nikko Salomon Smith Barney, said. "In the new year, the pace is accelerating."

LDP encouraging bank reform

Also Friday, Japan's ruling Liberal Democratic Party said in a draft policy statement that it would encourage aggressive disposal of bad loans.

Market watchers have clamored for the government to force Japanese banks to write off vast number of bad loans they are carrying on their books. They see bank reorganization as the first step toward economic reform.

Friday's disappointing economic numbers reinforced surprisingly bad industrial-production data on Wednesday.

Unemployment stayed at 4.9 percent for January, the same as the previous month, the Ministry of Public Management, Home Affairs, Posts and Telecommunications reported.

More worrying to economists, the number of job vacancies dropped. For everyone 100 people looking for positions, there were 65 jobs available in January. That's down from 66 in December.

The number had been rising. Economists say it is a leading indicator of the Japanese economy, unlike the unemployment rate, which tends to lag other numbers.

"It's certainly something we're taking very seriously," said James Malcolm, senior economist for J.P. Morgan. He is watching to see if the trend continues next month.

The number of jobs offered by companies dropped. That shows business spending is weak, like in the United States, Malcolm said. The industrial-production figures showed exporters have undergone a rapid slowdown, driven by a drop in U.S. demand.

Fear of a consumer follow-on

Economists worry that Japanese corporate problems could spill over into consumer spending. Japanese deflation is already squeezing profits.

The Tokyo-area consumer price index for February fell 0.5 percent in February from a year ago. That marked a record 18th month of declines. The Tokyo CPI comes out a month ahead of national numbers.

Because food spending was high due to a cold winter, economists also look at the core rate, excluding food. That declined even more, falling 1.1 percent from a year ago.

Experts cautioned against reading too much into the Tokyo numbers, which are volatile month-to-month. Tokyo has also had weaker numbers than the rest of the country.

But they worry that problems with Japanese industry will ultimately spill over to consumers.

"We need to avoid a deflationary spiral," Fujii said. She said Japan needed quantitative easing of monetary policy.

That means the Bank of Japan needs to inject more money into the Japanese economy, perhaps by buying more government bonds. The LDP also said Friday it would ask the BOJ to take such steps.

Japan watchers believe any recovery will revolve around a rebound in U.S. prospects. Japanese unemployment will likely remain weak for the rest of the year, they say.

"The main source of the problem at the moment is clearly the U.S. and the tech cycle," said Richard Jerram, chief economist at ING Barings. Weak U.S. demand is hurting Japanese exports and production, which will ultimately spill over into Japan's domestic economy.

Debate continues as to whether the United States will have a rapid V-shaped recovery. Experts had hoped that was occurring. But the latest data suggests any recovery may well be a U-shaped ascent. Japan's fate is tied to the steepness of the slope.

The Nikkei continued its slide Friday. In early afternoon trading, the index, already at a 15-year low, had slumped 2.2 percent, to 12,401.

Market watchers note the broader Topix has not suffered as severely. The Nikkei has a heavy tech component after rebalancing last year.

But the Topix was also down 1.7 percent to 1,206. That's below its low of March 1999.

"The good stories are long term, not this year," Fujii said.

Reuters contributed to this report.

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