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.
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