By Paul Blustein and Akiko Kashiwagi Washington Post Staff Writers Friday, September 7, 2001; Page A01
The global economic outlook darkened this morning as Japan announced that its economy shrank sharply in the second quarter, a day after stock markets in Europe plunged to two-year lows.
Japan's gross domestic product declined at an annual rate of 3.2 percent in the April-June quarter, affirming widespread predictions among private economists that the nation's economy is sinking into its third recession of the past decade.
The simultaneous arrival of bad news and surge in market pessimism in Japan, the European Union and the United States, where markets yesterday hit their lowest levels since April, were the latest manifestation of a worldwide economic slowdown.
The slump is particularly worrisome to economists and policymakers because it is "synchronized" - that is, afflicting the world's biggest economies at the same time. By contrast, the last time the United States went into recession, in the early 1990s, Japan was still enjoying strong growth, along with Germany and the emerging economies of East Asia, helping to buoy the economies of other nations.
During this year's second quarter, the U.S. economy grew at a meager 0.2 percent annual rate, according to Commerce Department figures reported last week. Fears that U.S. corporate profits will continue to be disappointing because of generalized economic weakness led American stock indexes lower yesterday. The Dow Jones industrial average fell 1.9 percent to close at 9840.84. The Nasdaq composite dropped 3 percent, to 1705.64, its worst close since April 4.
In Europe, meanwhile, recent government data show that in the second quarter Germany's economy did not grow at all, and Italy's contracted slightly. Concerns about lackluster economic performance in Western Europe, where many forecasters anticipate growth of less than 2 percent this year, caused share prices to tumble yesterday. Germany's main stock index fell 3.4 percent to a 29-month low; Britain' dropped 2.1 percent to its lowest level in 34 months; and France's slid 2 percent, hitting a 23-month low.
This morning's economic news from Tokyo demonstrates that Japan is the weakest of the three major economic powerhouses. And many economists believe Japan's economy will continue to contract this year. That is because Japanese companies still must work off excess inventories and are unlikely to consider investing in new plants and equipment until well into next year.
The latest report compounds the challenges facing the reform-minded government of Prime Minister Junichiro Koizumi. The Koizumi cabinet, which has pledged to tackle the huge bad-loan problems plaguing Japanese banks, has also promised to cap deficit spending, on the grounds that government borrowing has gotten out of hand in recent years. But analysts predicted that today's report will force the government to accept the need for an economic stimulus package. Koizumi said he would make a decision about a stimulus package after seeing the economic numbers.
"I think we are effectively in a recession," said Tomoko Fujii, an economist at Nikko Salomon Smith Barney. "There is no other way but to mix structural reforms with some short-term stimulus measures" to keep the economy from entering a free fall.
There are some signs of recovery elsewhere in the global economy, especially in the United States, where the Federal Reserve has cut interest rates seven times this year. Some leading indicators of U.S. economic performance have been rising in recent months, and on Tuesday, a survey of purchasing managers suggested that the battered manufacturing sector turned up in August. In Germany, a closely watched measure of the business climate recently rose.
But just as increasing economic interdependence among nations ensured that the U.S. boom of the 1990s would help keep much of the rest of the world out of recession, now those same linkages are working in a negative way. Weakness in the U.S. market has translated into sluggish demand for goods made overseas, and slumps in foreign markets have resulted in cutbacks in U.S. exports.
"This is the first global downturn in a very long time," said Neal Soss, chief economist at Credit Suisse First Boston. "Ten years ago when the U.S. went into recession and then had a slow recovery, Europe was in the midst of German reunification and the boom that that brought. So this is a particularly dangerous circumstance, because it's hard to identify where the engine of recovery will be."
On the brighter side, Soss added, U.S. consumer spending - the savior of the global economy's performance in recent years - has held up remarkably well this year, and he emphasized that the stock market declines in the United States and Europe do not necessarily reflect economic reality. But the plunge in share prices may well hurt economic growth.
In an effort to defuse one controversy concerning Japan's economic problems, Hakuo Yanagisawa, head of the Financial Services Agency, declared yesterday during a visit to Washington that he is willing to allow the International Monetary Fund to assess the state of the nation's banking system - though he declined to say when.
Last week, Yanagisawa rebuffed the IMF's request to send a team to conduct an in-depth review of Japanese banks under a program designed to strengthen financial systems around the world. His assertion that Japan's Financial Services Agency lacks the staff to handle such a review was questioned by some analysts because Tokyo has a history of withholding embarrassing data about its banks.
Yanagisawa said he assured IMF Managing Director Horst Kohler that he views the IMF audit "in a positive light." But he balked at establishing a timetable, saying his agency's staff shortage meant that "even with a tiny bit of additional work, we will collapse," he said.