In Japan, Recession Is Unpopular; So Is Reform

When it comes to asset values in Japan, speculative bubbles apparently don't pop, they explode.

Still, such an explosion has failed to sufficiently stir the government.

Since a bubble in equity and real estate markets burst early this decade, Tokyo has stood by as bad loans of Japanese banks have swelled to an official figure of about $600 billion. Many analysts put the number closer to $1 trillion or more.

Straining under a mountain of nonperforming loans, Japanese banks have severely slashed lending, putting businesses in a credit crunch.

A recently announced $94 billion government program to cleanse the banking sector of bad loans and either merge or purge the weakest banks is widely regarded as insufficient.

"That is not anywhere near enough," says Sung Won Sohn, chief economist at Norwest Corp. in Minneapolis. "Ninety-four billion is peanuts."

Tight credit practices by ailing banks have helped push Japan deep into recession. In the first quarter, growth in Japan's economy sagged at an inflation-adjusted rate of 1.3 percent, an annualized decline of 5.6 percent.

It was the second consecutive quarter of negative growth.

"Relief is at least a year away," says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y.

The government says a $112 billion package of tax cuts and stimulative spending will turn the economy around. But many economists doubt even that can counter the downward pressure caused by falling demand for Japanese exports, deflation, and the slump in capital spending.

Japan could be spinning down in a deflationary spiral of a scale last seen during the Great Depression, they say.

Washington for nearly two years has urged Tokyo to shake up its banking system, drop barriers to trade and investment, and enact deep and lasting tax cuts.

Tokyo - responding in part to lack of public support - has adamantly resisted such dramatic steps.

Except for the growing ranks of unemployed, most Japanese have been cushioned from the recession by state-mandated protections for their jobs and paychecks. The challenge for Japan's leadership, say analysts, is to reform the economy despite popular opposition.