Japan admits recession

Koizumi is at a crossroads, hoping to push painful reforms just as Japan falters

By CNN's Alex Frew McMillan and wire reports

TOKYO, Japan (CNN) -- Japan is experiencing a recession, Finance Minister Masajuro Shiokawa admitted Thursday.

"It is true that weakness in economic conditions have gone beyond our expectations," he said.

"We do expect growth in the April-June quarter to be worse than that in the January-March quarter."

That means Japan is already in its fourth recession in a decade. It would meet the U.S. textbook definition, two consecutive quarterly drops, when the next numbers come out.

The world's second-largest economy only exited its last recession in April 1999.

But the government said Monday that gross domestic product for the March quarter shrank 0.2 percent -- it had been expected to grow slightly.

Koizumi still pressing for change

VIDEO Japan's Economics Minister Heizo Takenaka talks to Bizasia's Dalton Tanonaka about predictions for economic recovery. Play video (QuickTime, Real or Windows Media)

Despite that weakness, Prime Minister Junichiro Koizumi promises to push ahead with reforms having swept to power in April on a platform of change.

First he needs to see his party through Upper House elections in July, he says. Then those reforms will take time.

"We should keep our eyes focused on where the economy is headed," he told parliament on Wednesday, warning against paying too much attention to stock-market moves.

Economics Minister Heizo Takenaka also told CNN the government's game plan is long-term.

"If things go well, I expect the Japanese economy will recover its vitality in three years or so," he said.

Overseas investors have beaten down Japanese stocks, disappointed with both the pace of change and poor growth. The Nikkei is down 6.8 percent for the year.

For the record, and the market watchers, Tokyo stocks closed slightly higher on Thursday. The Nikkei moved up 0.2 to end at 12,846.66.

Japan to get worse before it gets better

But where is Japan's economy headed? It's likely to get worse, as Koizumi tries to turn Japan around.

"We must bear pain today and do our best for a better future," he has warned.

Most had anticipated Shiokawa's admission of a slump.

"All the components of demand, whether consumption, capital spending or public spending, all of them are likely to be negative," said Jesper Koll, chief economist at Merrill Lynch. "You are in a recession."

Japan watchers are instead wondering whether the country can post positive growth for the year. Many think it won't.

Koll expects a third down quarter, and a drop of 0.6 percent for the year through March. That would make for the first down year since 1998, when the economy shrank 1.1 percent.

Japan's current-account surplus had a precipitous 24.4 percent decline in April, to $7.2 billion. That's the fifth month of declines, caused by a dip in exports, normally Japan's strength.

Few weapons in the arsenal

Koizumi admits his arsenal to combat the weakness is pretty bare. "The government holds fewer options to spur the economy than before," he said.

Past Japanese governments have tried to spend their way out of trouble. One solution to a downturn was a supplementary budget - that, critics say, was often then wasted on unnecessary construction projects.

Koizumi has resisted an extra budget, pledging instead to cap government spending and to deal with the vast bad loans on banks' books over the next three years.

Those problem loans are rising. For the biggest banks, they hit $148 billion (17.95 trillion yen) in March, although the actual number is probably much higher.

"It's usually pick a number, double it and add 10," says James Malcolm, senior economist with J.P. Morgan.

The banks need government backing, experts say. Despite official denials, experts anticipate an extra budget this fall. Both would come after the elections because they will be unpopular with voters.

One thing the prime minister has going for him is his record popularity, which keeps rising. That may help keep Japanese confidence up even as he pushes changes that will lead to job losses and bankruptcies.

But with an election coming up and Japanese growth sliding, Koizumi will have to backtrack on the pace of change, experts say.

"He has a broad framework in mind. He has to be a little flexible in terms of how it is implemented," Malcolm said. "He's got everything to gain by waiting and nothing to lose.

Reuters contributed to this report.