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Japan Expects Economy to Shrink for 2nd Straight Year

Asia: Tokyo, which originally forecast growth, says GDP will fall 1.8%, biggest postwar loss.

October 06, 1998|From Times Wire Services

TOKYO — The Japanese government slashed its fiscal 1998-99 economic forecast today, predicting gross domestic product would shrink an inflation-adjusted 1.8% instead of growing 1.9% as originally forecast.

The Economic Planning Agency reported the revised forecast at a Cabinet meeting that was to discuss possible new stimulus measures. Under the forecast, Japan's economy would log its biggest postwar fall in the year ending in March and the first two-year string of GDP contractions in the postwar period. The forecast would be the second straight year of record contraction.

Declining production, worsening employment conditions and deteriorating business sentiment necessitated the revision, the agency said.

Japan's economy, which had been stagnating for six years, has been deteriorating since April 1997 when the government raised the national sales tax to 5% from 3%. The government also ended tax breaks and raised health insurance premiums, further damaging consumer spending. The collapse of Asian economies--the largest buyer of Japanese manufactured goods--and the failure of two major financial institutions last year led to cuts in production, wages, jobs and capital spending.

Capital spending accounts for 10% of economic output and consumer spending for 60%. With these two engines of growth sputtering, government efforts to boost activity with $124.2 billion in spending have been ineffective.

Under the revised forecast for the current year, the government sees private capital investment declining 10.1%, the lowest figure since 1993, when companies slashed spending on plants and equipment by 10.4%. Government officials said weak consumer demand led companies to cut capital spending, while small and mid-size companies are finding it particularly difficult to borrow money from banks.

In calculating its new estimates, the government is assuming that there will be no failure of a large Japanese financial institution and that there will be no major effects on the financial system or extreme currency movements caused by disturbances in the world economy.

For the forecast, the government used an exchange rate of approximately 142 yen to the dollar for the year through March, up from 120.72 yen for the previous year.

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