Japan's woes mean a fresh blow to Asia

Japan's woes mean a fresh blow to Asia

MANILA (Reuters): Japan's recession means it will take even longer than expected for the rest of Asia to pull out of its year-old financial crisis, the chief economist of the Manila- based Asian Development Bank said yesterday.

"The picture is grimmer than we expected," Jungsoo Lee told Reuters in an interview.

"I had said (before Japan's problems, there would be a recovery) within two to three years. But I may now have to change that to three to five years," he said.

"The big question is whether the Japanese economy can really recover."

Latest figures show that by the end of March, Japan was formally in recession, struggling with its worst economic slump for 23 years.

Lee said Japan should stick to fiscal policies to revive its sagging economy since monetary measures were unlikely to work in the current "liquidity trap" where money does not circulate properly.

"I think Japan is in a liquidity trap. So if interest rates are lowered, the economy won't respond. Fiscal policy may be the right approach," he said.

The problem is whether money released by tax cuts would go into economy-boosting consumption or simply end up in savings accounts, he added.

The plunge of the Japanese yen, currently near seven-year lows, is especially worrying.

If it continued to fall too far, it could force a devaluation of the Chinese yuan and trigger another disastrous round of competitive currency devaluations in the region.

"I hope there is international collaboration to maintain the yen at reasonable levels," he said.

If the yen stays below 150 to the dollar, China can cope but if it falls to 160 or 170 then the pressure will be strong for China to devalue the yuan, Lee said.

The yen is currently trading around 142 to the dollar.

"The continued depreciation of the yen will aggravate the Asian situation and will not be good for the global economy."

U.S. Deputy Treasury Secretary Lawrence Summers is due in Tokyo on Thursday but analysts doubt his talks will result in any major agreement to help the tumbling Japanese currency.

Lee described prospects for the region as "grim," especially in Southeast Asia where Indonesia, Thailand and Malaysia can all expect negative growth in gross domestic product this year.

Singapore and Taiwan may do better than expected, but South Korea's economy will contract while Hong Kong's GDP growth will be lower than earlier expected.

Questions remain over how long countries can maintain the tight fiscal policy and high interest rates which were meant as temporary measures to keep on top of the crisis.

"There aren't so many alternatives. That's the big problem."

Separately officials at the ruling Liberal Democratic Party in Tokyo have promised to take steps to make it easier for banks to get bad loans off their books to an emergency session of parliament after a July 12 election for Japan's Upper House.

The party has also begun debate on creating a "bridge bank" to provide funds to healthy firms left in the lurch when financial institutions fail.

Japanese Parliament's Upper House, meanwhile, yesterday approved an extra budget to finance part of a massive stimulus package unveiled in April, measures which Japanese officials have insisted would get the economy growing again by autumn.

But worries persist that a pre-election policy vacuum will delay progress on measures for the banking system, and while a sense of crisis has mounted in Asia and elsewhere outside Japan, many here seem oddly calm.