Lost Decade is No Proof Against Recession

It was tempting to believe, even as the Tokyo stock market embarked on the most critical period in its history a few weeks ago, that the Japanese economy's worst days had already been and gone.

Surely its nadir - or so the reasoning of the optimist went - was the bursting of the postwar bubble in the early 1990s, the years of drift and decline and, finally, the spectacle of a massive, if belated, bank bail-out.

But the notion that financial crises are a throwback to an era that ended with the death throes of the "lost decade" is being exposed as so much folly.

Yesterday, as the Nikkei benchmark index slumped to a 26-year low, Japan's biggest banks were again nursing their wounds. You have to go back a quarter of a century to witness the Nikkei struggling as it did yesterday, when it lost more than 6% to end at 7,162, its lowest level since October 1982. The Nikkei has lost more than 20% since last week and 40% in the past month.

If history repeats itself, the current stock market nosedive may yet prove to be the harbinger of a rally that will take it to heights currently unimaginable on the floor of the Tokyo Stock Exchange or in the boardrooms of Sony, Toyota and Canon. After all, by 1989, the Nikkei had risen to a barely comprehensible 40,000.

In truth, though, the immediate future promises to be one of unremitting pain for the world's second biggest economy. That sense of foreboding was crystallised yesterday by a G7 warning on the yen's dramatic recent gains against the dollar, forcing exporters to revise downwards earnings and sales forecasts.

Recent data resounds to the unsettling echoes of past misery. Demand is weakening at home and from the US and China - in recent times reliable drivers of Japan's export-led recovery.

The forces of that recovery are suffering once more. Sony has seen its share price plummet, and last week reduced its full-year profit forecast by 38%. Toyota, which now appears destined to overtake General Motors as the world's biggest carmaker largely by default, has lowered its global sales forecast. And mega banks such as Mitsubishi UFJ - itself a byproduct of Japan's last financial meltdown - have made, or are seriously considering, new share issues to raise capital.

After weeks of mild prevarication, Japan's leaders are sufficiently alarmed by the fading fortunes of the country's banks to introduce tighter controls on short selling and expanding a government fund to recapitalize banks to as much as 10 trillion yen from 2 trillion yen.

Japan's economy shrank in the second quarter of this year, stoking fears that the trend will be repeated for the current quarter, in turn confirming what some analysts believe, that Japan is already in recession. Corporate bankruptcies leapt 34% last month at their fastest pace in eight years, construction material prices are rising and smaller companies are finding that the lending tap is running dry.

This week saw warnings that property prices face an imminent collapse now that prospective homeowners are failing to take up the slack of oversupply in the residential housing market.

Japan's jobless rate hit a two-year high and the availability of jobs sank to a four-year low in August. Retail sales have been weakened by slow personal consumption and high food and energy prices, with forecasts warning of similarly flat conditions to come.