[April 12, 2008]

Export-dependent Japan in danger of going into recession: economist+

(Japan Economic Newswire Via Thomson Dialog NewsEdge) TOKYO, April 13_(Kyodo) _ Japan may slide into recession due to the impact of the faltering U.S. economy, as Japan's economy is more fragile than many other industrialized and emerging countries due largely to its heavy dependence on external demand, Standard Chartered Bank's chief investment strategist, Lim Say Boon, said in a recent interview.

Lim views the United States as already having fallen into recession as a result of the subprime mortgage crisis and its negative effects are likely to spread to the rest of the world.

"Japan is in danger of going into a recession," Lim, the London-based bank's strategist for global wealth management business, told Kyodo News.

He said that even if Japan avoids a recession, growth will slow to 1.2 percent this year in terms of real gross domestic product, compared with 2.1 percent in 2007.

Lim said, "When demand from the U.S. slows, that's going to affect Japan, not just directly but also through China," which became Japan's largest trading partner exceeding the United States in fiscal 2006.

He said Japan is also suffering from falls in domestic demand amid a graying population and the yen's appreciation.

In addition, the Bank of Japan's key short-term interest rate is just at 0.5 percent, which means the nation has little room to cushion the impact of a U.S. recession through monetary policy, he said.

He said it is "really ironic" that Japanese stocks are performing more poorly than U.S. stocks although the latest global financial market turbulence was triggered by the U.S. subprime mortgage market crisis.

But from now, there will be another slump on Wall Street, he said.

"The U.S. is the center of a financial earthquake. How come the stock market is still performing in line with the global benchmarks," he said. "I think there is worse yet to come for the U.S. market."

Last Tuesday, the International Monetary Fund said the deepening U.S. subprime crisis could cost the global financial system an estimated $945 billion.

Lim said such a loss would be about six times larger than that in the Savings and Loan crisis in around 1990, and there is a "huge" risk that the loss in the current crisis could swell further, because U.S. housing prices have only gone down 10 percent on average, much smaller than the burst of other countries' housing market bubbles.

As for Japan, gloomier economic prospects pose a risk of further fall in foreign investors' money to Japan's stock market, he said.

Foreign investors have been major buyers of Tokyo stocks over the past five years, but the size of their buying slowed significantly lately. This is mainly because of disappointment in the slow pace of the Japanese economic recovery, and more attractive investment opportunities emerged elsewhere, he said.

Amid growing concerns over hostile takeover attempts, Japanese companies are increasingly introducing defense measures and boosting cross-shareholding ties between friendly business partners.

Lim said a more open mergers and acquisitions culture could bring more money to Japan, but it also has side effects.

"If you have a more aggressive, or a more open mergers and acquisitions culture, for a certain period of time, you will see people making aggressive bids, raising prices," he said.

But as a risk factor, he pointed out that companies may be pressed to produce results in the short term, possibly in one quarter, in a very aggressive shareholder culture, and that does not necessarily bring a good outcome either.

He said that right now the main driver of the stock market is the subprime mortgage crisis and a U.S. recession. Under their impacts, Lim said Japan's key Nikkei stock index is likely to continue to underperform the global benchmarks for the time being.

Copyright ? 2008 Kyodo News International, Inc.

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