Japan heads into
2002 on low note

Rising debt and joblessness don't
bode well for the coming year

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By Ann Saphir
Bloomberg News

TOKYO >> This is one of Japan's worst years on record, as rising unemployment, bankruptcies and national debt batter an economy that started the year in decline and is closing it with no recovery in sight.

Industrial production, once a star performer, had sunk to a 14-year low by November, job cuts by manufacturers have pushed unemployment to a postwar high, and the economy forecast to record two straight years of contraction in fiscal 2002 for the first time since World War II.

The Sept. 11 terrorist attacks in the U.S., Japan's largest trading partner, deepened the recession there and killed any hopes that exports could pull Asia's largest economy out of its domestic malaise. Export volumes have dropped every month, from the same month a year ago, since January.

"Japan's economy deteriorated this year because of external reasons," said Yasushi Okada, chief economist at Credit Suisse First Boston Securities (Japan) Ltd. "From now on, it will start to get bad in earnest as problems become more internal."

Company profits are sliding with the economy. All told, profits in the first half fell by a third, with manufacturers' earnings falling by more than half. Fujitsu Ltd., Hitachi and Toshiba, three of the nation's four biggest chipmakers, ranked among Japan's top 10 losers in the fiscal first half ended Sept. 30, after ranking among its 30 biggest money-makers a year earlier.

Hitachi, Toshiba, and other companies have announced a combined 100,000 job cuts in Japan since Sept. 11 as sales shrank. Job cuts such as these have pushed unemployment to a post-war high of 5.5 percent in November. The government expects it to average 5.6 percent next year.

Worried workers and their families have tightened their purse strings, forcing retailers to cut prices to boost sales. Consumer spending, which makes up about 55 percent of the economy, fell 1.7 percent in the third quarter.

The sole bright spot for harried consumers -- falling prices -- is one of the government's main concerns. Bank of Japan Governor Masaru Hayami and other policymakers warn the economy is on the brink of a deflationary spiral.

Businesses that can't bear the pain have been going bankrupt in rising numbers. Japanese bankruptcies are on track to reach a 17-year high this year, according to research company Tokyo Shoko Research Ltd.

Bankruptcies throw the spotlight on Japanese banks' shaky finances. Saddled with more than $1 trillion in bad and risky loans, the nation's lenders can't keep up with companies that are going out of business faster than banks can write off debt. That's setting Japan up for an even worse year in 2002, economists say.

"Next year, the risks shift back to the domestic front and the credit conditions for the corporate sector," said Vincent Musumeci, a Hong Kong-based economist at ABN Amro Securities. "Lending attitudes are likely to tighten."

Business confidence has taken a beating, falling to its lowest in almost three years in December. The BOJ's quarterly Tankan index of confidence among the nation's biggest manufacturers slid to minus 38, from minus 33 in September. A negative reading means more executives see worse times ahead than those who expect better conditions. "The report shows that the worst is yet to come," said Eishi Yokoyama, an economist at Chiyoda Life Capital Management Ltd. "There'll be no immediate recovery in business spending."