Recession Repeat Looms Over Japan

Economists say Japan’s chances of avoiding its second recession in 18 months are getting dicier by the day, and were worsened over the weekend by another political scandal that promises to slow action on measures to keep the lackluster economy struggling along.

“I think there’s a growing possibility the Japanese economy will see a hard landing,” said Yi Chang, analyst with Sumitomo Marine Asset Management. “Economic policy is in a political checkmate.”

That sense of political checkmate was compounded by allegations that Fukushiro Nukaga, state minister for economic and fiscal affairs, received $129,000 from a scandal-tainted insurer of small companies. Nukaga has denied any impropriety and says his secretary made a mistake. He resigned today and became the third member of Prime Minister Yoshiro Mori’s Cabinet to quit under a cloud in nine months.

The damaging disclosures threaten to make passage this year of Japan’s national budget more difficult. They could also undermine efforts to prop up stock prices in advance of the March 31 end of the fiscal year in order to salvage company and bank balance sheets.

The benchmark Nikkei average closed at 14,032.42 on Monday, up 43.30 points, as part of a recent modest recovery. This has eased immediate fears of a meltdown, but the market’s 27% drop in 2000 was still the worst annual performance in the last decade of economic gloom.

This year, the government is not expected to use postal savings and government pension funds to buy stocks directly, as it did in past years. It is, however, considering less obvious measures to accomplish the same goal, including the elimination of double taxation, emergency fund injections and steps making it easier for companies to buy back large amounts of their own stock.

It’s been Nukaga’s job to ensure that supporting legislation is passed--including stronger safeguards against insider trading--so the measures are put in place by April 1. That task now falls to his successor, veteran economic planner Taro Aso, a former head of the Economic Planning Agency.

Moreover, Japan has been hit by a string of bad economic news in recent weeks. Consumer spending, which accounts for 60% of gross domestic product, has faltered as pay envelopes grow thinner, the stock market declines and more companies go out of business.

“These days I’m turning off lights and cutting back on gas, electricity and water,” said Itaru Tsuda, a 52-year-old Tokyo salaryman. “My wife’s tried to cut back on every little bill. Our phone broke recently and we had to buy another one, but other than that we don’t buy anything we don’t absolutely need.”

Business spending on capital equipment, one of the few bright spots last year as Japanese companies scrambled to buy technology, also is losing momentum. The government projects a 2.1% decline in capital spending for the fiscal year starting April 1, following an expected 9.4% leap this year.

A third big cylinder in the economic engine, government spending, is dirty and clogged. Japan has spent an estimated $1.1 trillion on pump priming, subsidy payments and tax cuts since 1992 with little to show for it. Although lawmakers will avoid any sharp cuts in public spending, national debt is now 130% of GDP and could hit 140% by year-end, compared with 50% for the U.S.

“The government is at the point where it has no more money for public works,” said Yasuyuki Komaki, an analyst with NRI Research Institute.

Exports are now faltering as U.S. consumers start spending less. Direct Japanese exports to the United States are less vulnerable, in part because the yen has fallen nearly 10% against the dollar over the last two months, making imported Japanese electronics and autos cheaper for Americans when priced in dollars.

But Japan’s exports to Asia are falling sharply as Americans buy fewer products from China, South Korea and elsewhere, which often contain many Japanese components. As a result, any benefit Japan receives from a weaker yen will likely be more than offset by lower U.S. demand.

Monetary policy also offers little hope of a quick fix; Japan has boxed itself in with its policy of virtually free money. The country’s minuscule interest rates help struggling banks, for example, but hurt struggling life insurers. Almost everywhere they turn, policymakers face similar dilemmas. Furthermore, with Japanese interest rates now at just 25 basis points--a quarter of a percent above zero--there’s little left to cut.

“Another 25 points cut is not going to do much anyway,” said Garry Evans, strategist with HSBC Securities.

On other fronts, the outlook for GDP, industrial output, business sentiment, unemployment and future orders have weakened recently.

The latest scandal underscores how economic policy is often held hostage to politics in Japan. The group at the heart of the controversy, a not-for-profit insurer called KSD overseen by the Labor Ministry, was formed to help small companies cover their workers’ disability risk.

In fact, in the hands of its recently arrested founder Tadao Koseki, 79, it allegedly became a massive slush fund that helped elect members of the ruling Liberal Democratic Party, including Nukaga, which in turn attracted more public funds used for the expansion of Koseki’s empire.

Japan has been riveted by the juicy details, including reports that Koseki paid himself an $850,000 salary, lived in luxury in its plush headquarters, installed his relatives in key posts and stole funds to support his mistress.

A poll released Monday by the Asahi Shimbun newspaper put the Mori administration’s public approval rating at just 19%.

The question is whether this will translate into any real structural shift. With fiscal and monetary options blocked, consumers in a funk, business retrenching and trade horizons darkening, analysts as well as voters say Japan’s only door out of its darkened room is structural reform.

But many see more muddle ahead before Japan gives up its hope of achieving a recovery without getting hurt. “Change is so difficult in this country,” said HSBC’s Evans. “They only do it when they absolutely have to. And there still hasn’t been enough pain.”

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Hisako Ueno in The Times’ Tokyo bureau contributed to this report.

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Troubled Economy -- Again

A global economic slowdown is threatening to exacerbate Japan’s

internal problems and send the beleaguered country back into recession, analysts say.

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Bonds Signal Recession Fears . . .

The yield on the benchmark 10-year Japanese government bond fell below 1.5% Monday for the first time since mid-1999 as investors rushed to lock in yields, fearing they’ll fall further if recession hits.

Monday: 1.47%

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. . . and GDP Growth Slows

Japan’s economy slowed in the second and third quarters of last year, even before the U.S. economy began to decelerate sharply.

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10-year Japanese government bond yield, annual and quarterly closes and latest

3rd quarter 2000 (estimated): 0.2%

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Sources: Bloomberg News, Economy.com, Organization for Economic Cooperation and Development

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Researched by NONA YATES/Los Angeles Times