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Sayonara, Economic Growth?
Subject Recession, Economic Growth
Topic International Finance, International Trade
Key Words Recession, Interest Rates, Economic Growth
News Story

Japan released data confirming that output of goods and services contracted in the second quarter of this year. Japan's economy, trade and industry minister stated that it is unlikely that the economy will even attain zero economic growth for the fiscal year. Japan is technically not in recession, since last quarter's gross domestic product figures were revised to show a slight increase. Prime Minister Junichero Koizumi announced a new stimulus package, including emergency spending increases.

In spite of a number of campaigns to stimulate its economy, Japan has been virtually stagnant for a number of years. With tax revenues 20 percent below forecast levels, the proposal for increased emergency spending will likely add to an already high public sector debt. Japan has a national debt that is about 130 percent of gross domestic product. Mr. Koizumi has assembled a group of senior civil servants and charged them with identifying privatization prospects in an effort to reduce government spending.

The financial sector is riddled with bad debt. The extent of the problem is acknowledged to be large, but estimates of its magnitude vary widely. The International Monetary Fund has offered to send a team of experts to measure the problem and Japan has reluctantly agreed to work with that body. Many struggling companies may be destroyed if Japan follows through on its attempt to reduce or eliminate the financial sector's bad-debt problem. The elimination of these companies will increase unemployment and create additional problems for the economy.

The extent of Japan's problems is also reflected in Japan's labor market. Japan's latest unemployment rate reached 5 percent, the highest level in almost 50 years. Analysts claim that an alternative method of calculating unemployment would yield a rate of 11 percent. Japanese auto production is down, and a study released by a union group predicted that industry employment would fall by 20 percent by 2005.

Analysts have voiced concern that after coming to office on a program of economic recovery, Mr. Koizumi has yet to publish specific plans to accomplish this. After four months in office, many fear that his lack of specifics is a sign that he will never accomplish his objective.

(Updated October 1, 2001)

Questions
1. Japan's unemployment rate has increased significantly in the last year. What policies could the government of Japan adopt to reduce unemployment?
2. How would privatization reduce public spending?
3. Since interest rates in Japan are almost zero, could the central bank use monetary policy to stimulate the economy?
Source James Brooke, "Japan's Figures Officially Show A Contraction," The New York Times, September 8, 2001.

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