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Financial markets in Japan, well prepared for the U.S.-led attack on Iraq, bounced back quickly Thursday after the onset of war. But some experts warned that the nation’s fragile economy may be headed for tragedy.

Higher oil prices and a slump in the global economy could hamper Japan’s forecast of 0.5 percent economic growth in fiscal 2003, and financial support for a postwar Iraq could blow out already huge government debt, the experts said.

“If it takes more than six weeks to end the war, there will likely be a large impact on the Japanese economy,” Daiwa Institute of Research said in a report earlier this week.

If the war goes on six to 12 weeks, according to the think tank’s estimates, Japan’s real gross domestic product would contract by 0.5 percent in fiscal 2003 from the previous year. If the war continues more than three months, the GDP could shrink by 1.3 percent.

But if the war is over within six weeks, the GDP is expected to see 0.2 percent growth, the report says.

Higher oil prices will increase companies’ production costs, it says, adding that any slump in the global economy, combined with weaker consumer sentiment in the United States, would hurt Japanese exporters’ profits.

The report says that a rise in the yen against the dollar, which would undermine exporter’ profits, is a big risk.

According to a report by Central Research Institute of Electric Power Industry, a war running longer than six months would push the real GDP down 0.2 percent. But if the war ends in a month, the economy should make it through unscathed.

Yasunari Ueno, chief market economist at Mizuho Securities Co., said the U.S. economy — a key factor in determining the fate of Japan’s export-oriented economy — is expected to remain sluggish for a while, weighing down the Japanese economy and stock market.

Kenji Yumoto, chief senior economist at the Japan Research Institute, said, “Even if the war ends pretty soon and Japanese financial markets rebound, what makes the situation of Japan different from a decade ago is its huge fiscal deficit.”

The 1991 Gulf War cost Japan about $13 billion (1.7 trillion yen), but it did not hurt its economy because the country was then enjoying a boom in stock and land prices.

But any war-related financial support this time around would force the government to issue more bonds and put the nation’s coffers in an even more perilous state, economists said.

The government could resort to tax increases, but that would be bad news for people already struggling with shrinking salaries amid deflation, the economists added.

The government is widely expected to provide about $1 billion to Iraq’s neighbors in the form of loans and grants. Moreover, economists expect the government to fund the reconstruction and installation of a new government in Iraq, creating a major burden on the Japanese budget.

However, no costs have yet been calculated, they said.

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