Japan, the world's second largest economy, is falling into another recession. New statistics from the government released on Friday showed that output of goods and services in the second quarter contracted at a 3.2 percent annual rate.
Faced with so unequivocally downbeat a report, government ministers abandoned diplomacy and spoke bluntly. Takeo Hiranuma, the economy, trade and industry minister, told reporters, "The economy's footing has become very weak."
"Whether the economy will even attain zero growth this fiscal year is doubtful," Hiranuma continued.
A small upward revision in figures for the first quarter, from a slight contraction to slight growth in gross domestic product, means that conditions in Japan do not yet meet the usual technical definition of a recession, two successive quarters of shrinking economic activity.
But Japan's economy is clearly in "a severe condition," Prime Minister Junichiro Koizumi said Friday.
In response, Koizumi announced a package of emergency spending increases, known as a supplemental budget, that the economics minister, Heizo Takenaka, said was needed to keep the slowdown from "expanding into a spiral."
The economic drop is the latest addition to a mass of gloomy figures that will greet Paul O'Neill, the US treasury secretary, when he arrives Wednesday for a two-day visit to Tokyo as part of a weeklong tour of Asia.
Before departing from Washington on Friday, O'Neill called on Japan to take "real action" to clean up a huge overhang of bad bankloans that has hobbled the economy since real estate and stock price bubbles burst here a decade ago.
"It is time for decisive action to turn the Japanese economy around," O'Neill said Wednesday in Washington. "It isn't enough for the US economy to be the only engine for economic growth in the world."
The US engine itself is hardly humming these days, as Friday's report of a sharp jump in unemployment indicates. But the US is slowing down from a long boom, while Japan has been anemic for years. "Japan is going into a new recession before it ever recovered from the last recession," said Richard Katz, an author of a book on Japan's troubles.
With its tax revenues running 20 percent below forecast levels and the government turning to emergency spending in what has become an annual ritual, Japan's credit rating is slowly eroding. Moody's Investors Service placed Japanese government bonds on review, weighing a third downgrade since 1998, to AA, the same as Italy.
"What concerns us is that as the reform process drags on, there is a continued buildup of the government debt," Vincent Truglia, co-head of Moody's sovereign risk group, said in an interview. "Public sector debt is high by any measure. Then, fiscal stimulus becomes similar to a drug -- the more and more you use it, the less and less effective it becomes."
Eager to cut government spending somewhere, Koizumi commissioned a group of senior civil servants to identify candidates for privatization among 153 public corporations. Reflecting the depth of bureaucratic resistance to his plans, the panel found only four prospects.
Japan's financial system has grown so opaque and its bad debt problem so large that estimates of the scope of the trouble diverge widely, and few analysts believe its full extent is known. The International Monetary Fund discreetly asked Japan a week ago to allow it to send a team to size up the state of the banking system directly, an almost unprecedented intrusion in the affairs of a major economy.
At first, Japan's leading bank regulator, Hakuo Yanagisawa, refused, on the ground that his agency lacked the staff to assist the team. But he reversed himself on Wednesday, standing on the steps of the IMF's building to say, "We will work out an agreement."
The dead weight of the bad loans has also been blamed for dragging down the stock market. The benchmark Nikkei 225 index has threatened to slip below the psychologically important 10,000 level several times in recent days, and appears to be only a few weak sessions away from another benchmark of decline: closing below the level of the Dow Jones Industrial Average, which it has not done since 1957.
US, German and French stock brokerage houses here have announced layoffs, and according to a poll by Reuters, Western fund mangers reduced their holdings of Japanese stocks and bonds in August -- two ominous signs, because foreign investors account for almost half the Nikkei's trading volume.
The International Monetary Fund hopes to have its banking survey team in place by Sept. 30, the end of the first half of the Japanese fiscal year.
"Sept. 30th is going to be very tough," said Keiko Kondo, a senior strategist for a securities affiliate of a Japanese bank. In advance of that date, two of Japan's weaker big banks, Asahi Bank and Daiwa Bank, said Friday that they are in talks to merge their operations.
The picture is no better in Japan's labor market, where the true extent of the country's troubles are also somewhat obscured in the official statistics, dire as they are. After the government reported that the official unemployment rate had reached 5 percent, the highest level in nearly half a century, the Public Management Ministry said that a more inclusive method of calculating the rate would find that nearly 11 percent of workers are seeking a job.
Cleaning up the bad loan problem will require turning off the tap for many struggling companies, exacting a social cost that few Japanese politicians are prepared to bear. "If you do this, you are talking at a minimum about 3 to 4 million people losing their jobs," Katz said.
After four months in office, Koizumi has yet to be very specific about his plans to heal Japan's economy, and some Japanese are starting to voice doubts that he will ever accomplish much.
"These were not the empty 120 days, but they were very counterproductive at best," said Yoshi Tsurumi, an international business professor and author of a recent book that criticized Koizumi.
"This is a phony reformist. On the economic policies, he talks about changes and everything, but he has no plans, no specific plans."
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