- The Washington Times - Wednesday, March 14, 2001

TOKYO (AP) Japan appears to be headed toward a serious economic crisis, with the stock market plunging to 16-year lows, talk of deflationary dangers and a morass of confusion in its political leadership.
Surprisingly, a sense of crisis is hard to find among the public here.
Most Japanese don't own stocks. Lower prices are seen by many as good news in a notoriously expensive nation. And backroom bickering over who might replace this country's lame duck prime minister is viewed as no more than another Kabuki play.
But many indicators are ominous for the world's second-biggest economy. The finance minister acknowledged yesterday what has been the latest fear for economists here: deflation.
"The economy itself is certainly in a state of deflation. There is no hiding that fact," said Kiichi Miyazawa.
If left unchecked, deflation is extremely damaging by setting off a downward spiral that is difficult to stop: The fall in prices leads to declining profits, which in turn sets off shrinking income and spending that further drag down the economy.
For months, the central bank played down the possibility of deflation, saying that falling prices, which have continued for about a year and a half, show the market is finally opening up to competition. Speculation has been growing that the Bank of Japan may change that outlook soon.
Although the economy may manage the government target growth of 1.2 percent for the fiscal year ending this month, prospects are far more precarious for the months ahead as companies rein in spending and the U.S. economic slowdown devastates Japanese exports.
Tokyo share prices reached a 16-year-low yesterday. The benchmark 225-issue Nikkei Stock Average lost 2.89 percent to finish at its lowest close since January 1985. On Monday, the average had shed 3.75 percent.
But while many Japanese are worried, the public's haze of angst hasn't turned panicky. Japan has so far averted many of the harsher costs of economic deterioration, such as massive layoffs. Unemployment, although at a record high, is at 4.9 percent, not much higher than the U.S. jobless rate of 4.2 percent.
"As a consumer, it's good prices have come down," said Yu Suzuki, a 22-year-old student. "And we have the feeling that we'll manage, that things won't get so bad we can't eat."
Most Japanese shrug off the stock market slide as affecting only the rich. Mutual funds aren't as common here as in the United States. Only one in 14 Japanese owns stocks, according to the Japan Institute for Securities Information and Public Relations, which compiles information from stock exchanges.
But deflation has been devastating for Japan's homeowners who bought property about 10 years ago and have seen its value nose dive, in some instances by about a third of the price they paid.
Japan's downturn has its Asian neighbors nervous as well.
"We can't be too optimistic," said Tsai Hung-ming, secretary-general of Taiwan's Federation of Industries, noting a weak Japan paints a bleak outlook for the entire region.
In South Korea, Yonhap news agency said in an editorial: "Our economy is closely linked with those of the United States and Japan. We fear that the storms from the two countries may deal a heavy blow to our entire economy."
The experts acknowledge deflation is difficult to pinpoint.
Falling prices don't necessarily signal the negative social costs of deflation, they say, and could be a plus for consumers.
But the experts agree that deflation becomes critical if not answered with proper policy. Coherent political vision is precisely what is missing in Japan.
Most Japanese are disgusted by the wheeling and dealing rather than open policy debates that determine important decisions, such as who will succeed the deeply unpopular prime minister, Yoshiro Mori. Mr. Mori reportedly told party leaders he would step down, but then denied saying so. While high party officials want him out, there has been no clear indication of when he would go.
Yesterday, he said the ruling party will move up the date for its leadership elections, a step that most likely would hasten his departure from office. But he did not specify a date for the vote.
During nearly a year in office, he has done little to revive the economy.
"What's needed is to define the correct path to get out of deflation. But you need strong political leadership for that," said Takehiro Sato, an economist at Morgan Stanley in Tokyo.


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