Sun about to rise again in Japan

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The Independent Online
AFTER five years as the Land of the Setting Sun, Japan could wake up today to find a new economic dawn glimmering on the horizon.

Experts in Tokyo branches of British financial instutions say the mood there has changed dramatically since June, when no end could be seen to the country's five-year recession.

"Four weeks ago, the entire world looking in at Japan was bearish," said Chris Calderwood, the senior economist at BZW (Japan). "They thought the economy was about to eat itself in a deflationary fireball. That's total cobblers."

The economy is expected to grow by 1 per cent this year, a disastrous figure by post-war Japanese standards. But most companies have swallowed their recessionary medicine, and only the banks and property firms remain in a mess. Compared to recent performances - minus 0.2 per cent in 1993 and minus 0.5 per cent in 1994 - 1 per cent looks good. Mr Calderwood said: "It's a tribute to the raw animal strength of the economy."

Immediate factors encouraging the optimists are a cut in interest rates three weeks ago and the election today for the upper house of the Diet. The vote is expected to clear a political logjam that has prevented the government from introducing unpopular measures to bail out the country's ailing banks. Their non-performing loans, conservatively estimated at 40 trillion (pounds 284bn), are equal to almost 10 per cent of GDP.

Recent polls suggest the Socialists, part of the governing coalition, will lose more than half the seats being contested in the election. Although it is the party standing in the lower house that counts, such a severe defeat would strengthen the hand of their partners, the Liberal Democrats, who are thought to be more amenable to a bail-out of 2 trillion. "The effective veto the Socialists have enjoyed is likely to go," said Geoffrey Barker, head of research at Smith New Court in Tokyo.

The meltdown of the property market - the problem which started Japan's woes more than five years ago - could also be halted after a committee set up to look at the problem reports in September. If it recommends changes either to the taxes for sitting on property or the capital gains for selling it, real estate volumes could pick up again.

"Right now there's a desperate lack of liquidity in property," said Mr Calderwood. "There's a glut of sellers and no buyers." Mr Barker added that once property markets stabilise, the banks could price the collateral on their bad debts and securitise the loans.

Second-quarter economic statistics, also to be released in September, are expected to show a marked improvement on the first quarter, which was severely hampered by the Kobe earthquake.

The corporate sector is already showing healthy profits and improved balance sheets, although the turnaround has been largely ignored by the markets.

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