Is There A Recession In Japan's Near Future?

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Japan's Finance Minister, KIICHI MIYAZAWA, is regarded as the island of calm in the chaotic sea that passes for Japan's government. A former Prime Minister, the octogenarian was persuaded to stay on and lend a shred of credibility to an unpopular administration when YOSHIRO MORI came to power last April. So Miyazawa's unusually frank remarks last week about Japan's economy carried a particularly powerful punch. The country's finances, he said, "are near a state of collapse." The yen quickly slid to 20-month lows. Within days, Mori revealed to government insiders that he intends to step down.

Miyazawa was talking specifically about Japan's budget deficit, expected to reach $5.57 trillion at the end of March, nearly 130% of GDP, the highest proportion in the developed world. That's just the worst of many problems: stocks are trading at their lowest levels since the 1980s bubble economy popped; industrial production declined more than 11% in January; banks are sitting on mountains of bad debt; flaccid consumer spending has left the country in a deflationary spiral.

The government has dithered over what to do, and Miyazawa's ministry is feuding with the Bank of Japan. More bad news will come this week, with GDP figures expected to show a second consecutive quarter of contraction, putting Japan officially in recession. That's why Miyazawa's remarks were welcomed by some. "Finally, an admission that the situation is really severe," said a government economist. Now if only someone can figure out what to do about it.