Japan is likely to plunge into an economic crisis by September as it refuses to implement sweeping structural changes, a report by a senior analyst at a top Washington thinktank warned Thursday.
"After more than a decade of economic stagnation and minimal structural change, Japan stands on the brink of outright financial crisis," said Institute for International Economics senior fellow Adam Posen.
The only question, he said in the institute's monthly policy report, was whether Japan would fall victim in the next six months or delay the disaster until 2005 by throwing more money at the problem.
In early 2001, Posen had warned Japan faced a choice between preemptive action and a financial crisis.
Since then, Japanese Prime Minister Junichiro Koizumi had failed to implement adequate measures, the analyst said.
"No decisive action has been taken since the Koizumi cabinet took office in April 2000. Therefore the downside risks make it very unlikely that the baseline forecast [of modest economic growth] will be achieved," he said.
"In fact, the Janpanese economy is likely to to tumble into crisis some time before the Diet's supplemental budget process begins in September."
The Japanese economy was increasingly vulnerable to shocks as it was trapped in a tightening vise of debt-deflation and fiscal erosion, the analyst said, and there was no shortage of potential triggers for a crisis.
"One most likely trigger would be contingent claims becoming explicit on the government balance sheet, the impact of which would be amplified by policy mistakes," Posen said. "A crisis in Japan would not be Argentina redux but it would have severe consequences for the country and the world economy."
Despite painting the gloomy scenario, Posen said a crisis was still avoidable.
"A comprehensive policy package of bank closures and recapitalization, money-financed Bank of Japan purchases of long-term government bonds and replacement of public works spending with tax cuts could still save the Japanese economy from this fate," he said.
Stepped up pressure by the US and other governments could increase the chances of Japan taking such steps, he added.
"This policy brief makes the sober but realistic assumption, however, that there will be no meaningful change in Japanese economic policy until a crisis hits, and actions taken then will likely be too late to forestall the negative impact."
Meanwhile, blasting Japan for entering ``uncharted territory'' with high levels of public debt, Moody's Investors Service downgraded the country's credit rating Friday for the second time in six months.
The new ranking puts Japan, the world's second biggest economy and largest creditor nation, in the same league as Cyprus, Greece and Latvia. It's another blow to Japan as it struggles to pull out of its third recession in a decade.
As rumor of the impeding downgrade spread earlier in the day, Bank Minister Hakuo Yanagisawa admitted ``I'm worried'' about another blow to investor confidence.
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