Japan... Still ugly!

The news just keeps getting worse and worse. Japan’s economic outlook has continued to deteriorate in recent weeks. The sharp decline in business expectations and investment plans, excess inventories, rising job losses, limited policy stimulus, and weaker growth prospects abroad all point to an extended downturn in the economy. Some analysts are forecasting as many as six consecutive quarters of contraction extending through 2002! Even the Bank of Japan has acknowledged that the contraction will extend through this year, as will the persistent deflation.

Expectations of meaningful economic reform have faded with the economy. No quick action is expected on Prime Minister Koizumi’s reform plan for state enterprises. Investors are increasingly disillusioned about the prospect for a significant disposal of non-performing loans. Given mounting pessimism about the banking sector’s ability to get through the fiscal year-end without fresh injections of public capital, and the government’s insistence that no such measures will be forthcoming, the risk of another destabilizing shock would seem to have risen.

While it often makes good investment sense to buy when things look bleak, there is still room for the situation in Japan get worse, even from here.