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Japan's Annual Economic Report Touts Need for Reform - 2002-11-05

In its annual report on the country's economy, Japan's government warns that the nation is caught in a double-trap of deflation and slow economic activity. And things will get worse, the report says, if the U.S. economy stagnates. The government says Japan needs structural reform to revive its economy and bring it out of its worst downturn since World War II.

A government white paper released on Tuesday touts for the second year in a row the slogan "No gains without reforms." Still, it does not provide specific advice on how to implement reforms. The white paper follows a government plan unveiled last week for cleaning up bad loans, which was roundly criticized for lacking details.

Japan's economy managed growth of half of one percent growth in the quarter ending in June, but only after 12 straight months of contraction. Economic and Fiscal Policy Minister Heizo Takenaka acknowledged in a news conference that, so far, real economic growth is not occurring.

Mr. Takenaka tells reporters that Japan is seeing a vicious circle of deflation combined with the problem of bad loans. He added that the issue is how to tackle the problem. Mr. Takenaka says the government will hold further talks next month about tax cuts and possible fiscal steps to be taken to halt deflation.

Much of the reform focus is on Japan's huge pile of bad loans, conservatively estimated by the government at more than $350 billion. Tuesday's white paper warned that banks are not lending to growth sectors but to construction projects critics call wasteful and unneeded.

The white paper, officially known as the "2002 Annual Report on the Japanese Economy and Public Finance," mentions, for the first time, the problem of "asset price deflation." It notes that Japan has lost about some $9 trillion worth of capital since 1990, when inflated stock and property prices began a 12-year slide. That is about twice the amount of Japan's current gross domestic product.

The Japanese economy is especially vulnerable to external shocks, the report cautions, saying the fragile recovery could stall if the United States and other economies lose momentum.

Nearly one-third of the annual white paper deals with Japan's tax system, a controversial subject. The government needs to revamp individual and corporate taxes, the report says, if it wants to fix the imbalance between tax revenues and government spending.

One cabinet official on Tuesday said at a news briefing that the report will stand "as a foundation of tax reforms in the future."