Ota Says Strong Corporate Sector Keeping Japan Economy Afloat

By Toru Fujioka

July 4 (Bloomberg) -- Japan has managed to avoid a recession because the health of the nation's companies has improved from the decade after the asset bubble burst in the early 1990s, Economic and Fiscal Policy Minister Hiroko Ota said.

``Increased strength in the corporate sector is helping Japan stay on the cliff when the economy is being jolted by big waves from overseas,'' Ota said in an interview in Tokyo yesterday. Companies have shed debt, cut bloated workforces and got rid of extra capacity, she said.

The Bank of Japan's Tankan survey this week showed confidence among the largest manufacturers fell to a four-year low. The survey also showed that the labor market remains close to the tightest it's been in 16 years and there are few signs of the idle production capacity that contributed to Japan's three recessions since 1990.

``The economy is in much better shape than at similar stages in previous downturns,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London. There is ``little sign of the excess capacity or labor hoarding that might lead to a recession.''

Ota, 54, said her biggest concern for the economy is that manufacturers may be building up stock of technology-related products that may lead to a drop in production should global demand decline.

Inefficiency among service companies, which make up 70 percent of the economy, is preventing them from raising wages and that's weighing on consumer spending, Ota said.

Stalled Wage Growth

The stalled wage growth is a reason households aren't spending and ``that's why Japan doesn't have a risk of secondary inflation,'' Ota said. Japan's core consumer prices rose 1.5 percent in May from a year earlier, though mostly because of costlier imported oil and commodities.

Ota, who had been saying U.S. economy will recover in the second half of this year, said a pickup in the world's largest economy may be ``delayed'' because home prices are still falling.

Japan needs to maintain its pledge to balance the budget by 2011 and should only raise taxes if spending cuts and increases in revenue aren't enough to fund social welfare costs, she said.

After 2011, the government will need to commit to a numerical target to reduce the nation's ratio of debt to gross domestic product, the minister said. Prime Minister Yasuo Fukuda's economic advisory panel will start discussing the target from this autumn, she added.

The Organization for Economic Cooperation and Development estimates the ratio stands at 180 percent, making Japan the most indebted nation in the industrialized world.

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net