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Japan: public finances unravel

The key to prospects for world growth in 1999 is Japan. I expect the US economy to slow during the year and the core of Europe to grow by less than 2%. So the OECD as a whole is unlikely to achieve even 1% real growth this year unless Japan picks up.

Is Japan's deep depression showing signs of ending? No way! Monthly unemployment data have recorded successive post-war highs. Industrial output fell 8% year-on-year in October and retail sales by 5.5%. Steel production is down 11%. Capital spending fell 12% year-on-year in the third quarter of 1998 and machine tool orders were down nearly 30%. As I write, the Bank of Japan's Tankan quarterly survey of business activity is expected to produce a record low.

The economy is in a deflationary spiral, with wholesale prices down 3.5% year on year. Department store sales are still falling by over 4% a year and overall retail sales have dropped 5.5%.

Bank reform and fiscal stimulus have done little to lift the gloom. Bank lending is still contracting at a 4% rate. As a result, the web of financing that holds the Japanese economy together is unravelling.

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