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No. 8 — February 25, 2000

Feature Article

NEW DECADE, OLD PROBLEMS:
JAPAN STRUGGLES TO ACHIEVE SUSTAINABLE GROWTH IN 2000

Douglas Ostrom

Summary

Although some bright spots were visible, 1999 was a disappointing year for the Japanese economy. In a sense, that outcome was an appropriate ending for a decade during which Japan's reputation for a consistently strong economic performance was completely shattered. The economy was relatively weak last year despite a lack of catastrophic events. Instead, its minimal showing reflected the difficulty of resolving the imbalances created during a nearly decade-long period when growth slowed dramatically or even disappeared.

More of the same appears to be in store for 2000. Japan's excess of both capital stock and employed workers implies that investment demand and consumer spending alike will remain weak. Depending on still-uncertain political developments in a year when politics will take center stage on both sides of the Pacific, Tokyo may or may not be willing to continue filling the hole in aggregate demand that these imbalances have tended to create.

Ironically, the strength of the economy of the United States, which not so long ago looked to Japan for guidance on certain economic problems, is a reason to hope that the Asian nation may experience a surge of growth early in this century through the adoption of new technologies that trigger a jump in productivity. However, this development, if it comes at all, will take a back seat to the difficult job of economic restructuring — a task that will suppress gains over the short to medium term. Japan's price-adjusted gross domestic product in 2000 is expected to expand less than 1 percent, which is close to the current estimate for 1999.

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Weekly Review

TWO NATIONALIZED BANKS TO REEMERGE AS BANKING INDUSTRY RESTRUCTURING ACCELERATES
--- by Jon Choy

In yet another sign that Japan's banking industry is on the rebound from its nonperforming-loan problems, two big banks seized by the government in 1998 will be relaunched soon under private ownership. The Financial Reconstruction Commission approved February 9 the final terms of the sale of defunct Long-Term Credit Bank of Japan, Ltd. to New LTCB Partners CV, a foreign consortium put together by New York City-based Ripplewood Holdings LLC. The FRC then decided February 24 to give a domestic group led by Softbank Corp. the first chance to purchase Nippon Credit Bank, Ltd., the other major failed lending institution under government control. The "new" LTCB plans to open its doors in early March. Observers say that NCB could be back in business as early as June if negotiations proceed smoothly. The resurrected banks, which will rejoin a market that already looks very different from the one they left less than 18 months ago, will add further momentum to the restructuring of Japan's banking industry.

 

JAPAN'S CURRENT ACCOUNT SURPLUS CONTRACTED IN 1999 BUT NUMBERS STILL WORRISOME
--- by Douglas Ostrom

Japan's external imbalance in 1999 demonstrated an array of factors that affected the economy as it struggled to right itself after years of stagnation. The overall picture gleaned from the year's current account statistics is that of a recovering economy showing tentative signs of restructuring. However, Japanese investors appear to remain highly risk-averse when it comes to foreign investments, limiting the potential growth of investment income from abroad and arguably providing cause for concern about investor sentiment more generally.

 

TOKYO, WASHINGTON CONCUR ON WTO ROUND, REMAIN APART ON OTHER ECONOMIC, SECURITY ISSUES
--- by Barbara Wanner

Two high-level American and Japanese diplomatic delegations crisscrossed the Pacific during the week of February 13 to discuss a number of important economic and security-related matters. Garnering the widest press coverage was the February 18 meeting in Washington between President Clinton and Foreign Minister Yohei Kono. Their 20-minute tete-a-tete culminated in a joint call to members of the World Trade Organization to begin a new round of multilateral trade negotiations before the July 21-23 summit on Okinawa of the leaders of the Group of Seven industrial nations plus Russia. Mr. Clinton also pledged Washington's support to help ensure a successful G-8 gathering.

 

JAPAN-SAUDI NEGOTIATIONS OVER OIL-DRILLNG RIGHTS REACH FEVER PITCH
--- by Marc Castellano

Efforts by Arabian Oil Co., Ltd. and Riyadh to hammer out a deal to renew the Tokyo firm's drilling rights in the Saudi-controlled part of the Khafji oil field in the Persian Gulf have reached a fever pitch. With the active backing of the Japanese government, the desperate oil provider is trying to convince Saudi Arabia to extend its concession, which will expire at the end of February. Because talks held over the last few years have been unsuccessful and have left the key sticking point unresolved, the looming deadline has made Tokyo increasingly nervous. Ironically, the Saudi government owns 10.9 percent of Arabian Oil. The Kuwait Petroleum Corp. has an identical stake. They are the company's largest shareholders.

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