TOKYO, Nov 13: Japan’s economy may shrink for the next two years pressured by weak productivity at home amid a global slump, a top minister said on Tuesday, pledging to watch economic developments after a deadly US air crash.

Given that basic Japanese economic strength is low, there is a possibility that growth will be negative in the next fiscal year (to March 2003), State Minister for Economic and Fiscal Policy Heizo Takenaka told a parliamentary committee.

We have to manage the economy to avoid negative growth, but for the next two or three years we are faced with the view that the economy is in a severe condition, he said.

The crash, obviously, doesn’t provide a positive impact for demand in areas such as transport. It is necessary to watch developments cautiously, Takenaka told a regular news conference.

The government forecast last week the world’s number two economy would shrink 0.9 per cent in the full year to March 2002 and Finance Minister Masajuro Shiokawa said Tuesday Tokyo would issue an official gross domestic product forecast for the year to March 2003 early in December.

The lower house on Tuesday passed a slim $25 billion supplementary budget for the year to March 2002 in a bid to support the economy as it slips into recession.

Government officials said the extra budget was sent to the upper house for final approval as early as Thursday.

The package, aimed at creating employment safety nets, is much smaller than previous pump-priming measures reflecting reform efforts by Tokyo to cap fiscal spending and plug funds to public works projects.

But market players expect the government to spend more to offset a deep depression.

Prime Minister Junichiro Koizumi had promised to limit new government bond issues at 30 trillion yen to rein in exploding national debt, but has hinted at breaking the ceiling in light of the global trauma since September 11.

News of the new air disaster compounded flying fears Tuesday sending airline shares plummeting. The fall dragged the Nikkei-225 average of the Tokyo Stock Exchange below the symbolic 10,000-point mark, although it ended the day at 10,030.56 down 0.5 per cent.

Asia’s biggest carrier Japan Airlines Co. Ltd. (JAL) dropped 3.5 per cent to 289 yen, while Japan’s number two carrier All Nippon Airways Co. Ltd. also fell 1.9 per cent to 305 yen.

On Monday, JAL and domestic carrier Japan Air System Co. Ltd. announced they would merge next year under a holding company in a bid to boost business amid faltering demand.

Belief that mechanical failure and not terrorism caused the latest crash was immaterial, analysts said.

The important thing is that passengers are afraid to ride on aircraft, so whether (Monday’s crash) was terrorism or an accident has no meaning, said Credit Suisse First Boston transport analyst Osuke Itazaki.—AFP