[R-G] Frailty of U.S. Finances Has Japanese Agonizing

[Yoshie Furuhashi]

Read it with Carter Dougherty, "European Central Banker Says Inflation
Is Still Focus," 24 January 2008,
<http://www.nytimes.com/2008/01/24/business/worldbusiness/24euro.html>.
-- Yoshie

<http://www.nytimes.com/2008/01/25/business/worldbusiness/25yen.html>
January 25, 2008
Frailty of U.S. Finances Has Japanese Agonizing
By MARTIN FACKLER

TOKYO — As talk of an American recession has helped batter global
financial markets in recent weeks, economic policy makers in Japan,
the world's second-largest economy, have largely sat on the sidelines.

Japan's government and central bank have offered little to reassure
worried investors, even as waves of selling produced steep declines in
stock market indexes, including Tokyo's. This was in contrast to the
United States, the largest economy, where leaders are proposing a
roughly $150 billion stimulus package and cutting interest rates in an
effort to calm the financial turmoil.

Japanese officials say their hands are tied by the nation's soaring
budget deficit and already rock-bottom interest rates, which give
policy makers little leeway to maneuver. Yet a rising number of
politicians and economists here see their country as missing a chance
to regain some of its lost status as a global economic leader.

In Parliament and the news media, a debate is growing about whether
the country should do more to step into the breach caused by the
slowing of the American economic engine and help to prop up global
growth.

Some say that Japan is the best positioned in Asia to act, with a $4.7
trillion economy that remains much larger than its rivals China and
India. But even proponents of a more active approach acknowledge that
Japan's inability so far to help stimulate the global economy may be
just one more sign that the country is not the economic powerhouse it
used to be.

As Hideo Kumano, chief economist at Dai-Ichi Life Research Institute
in Tokyo, put it: "The No. 2 global economy, Japan, should be playing
a central role at a time like this. But the fact is Japan doesn't have
the strength or will to do that."

Prime Minister Yasuo Fukuda and other leaders have made it clear that
they view the current crisis as American in origin, and beyond their
reach. When questioned in Parliament on Tuesday about the global
financial turmoil, Mr. Fukuda replied that it was "not something that
came from the actual condition of Japan's economy."

However, on Thursday, a group of lawmakers from Mr. Fukuda's Liberal
Democratic Party, including former Prime Minister Shinzo Abe, proposed
several measures to revive Japanese stock markets, including
suspending capital-gains taxes and creating a sovereign fund to invest
in equities.

Economists called the proposals too small to make a difference. They
also said that Japan had few real options.

First, the nation is already burdened with one of the world's highest
levels of government debt, $7.2 trillion, making it very unlikely that
lawmakers would support an expensive package of new spending or tax
cuts large enough to stimulate a $4.7 trillion economy.

In addition, such a stimulus package would face a struggle in
Parliament, which has been in virtual political deadlock since the
opposition Democratic Party of Japan won control of the upper house
last summer.

Most economists say the likeliest step would be an interest rate cut
by the central bank, the Bank of Japan. Many prominent politicians
have urged the bank to lower the overnight lending rate back down to
zero, where it was two years ago, from 0.5 percent now. A few call for
more radical steps, such as intentionally creating low inflation to
rekindle growth.

"Concerns over a recession are emerging not only in the U.S., but in
Japan as well," Kozo Yamamoto, head of the ruling party's panel on
monetary policy, told Bloomberg News on Wednesday. "The B.O.J. should
cut rates back to zero immediately," he said.

But most economists say a rate cut has a 50-50 chance at best. The
current bank governor, Toshihiko Fukui, has a track record of
resisting rate cuts. In fact, he has repeatedly spoken in favor of a
continued raising of borrowing costs to prevent a repeat of a
situation in the 1980s, when cheap money helped to create disastrous
price bubbles in Japan's land and stock markets. Just last week, Mr.
Fukui reiterated his view that the current rate was too low.

A potential window for policy change appears next month, when the
government is expected to name a successor to Mr. Fukui, whose
five-year term ends in March. Of the two most likely candidates, one
is now a deputy bank governor, Toshiro Muto, who would be expected to
maintain the status quo. But the other, Kazuo Ueda, a former member of
the bank's policy board, has favored rate cuts to spur growth.

"The only effective policy option for Japan is choosing a more
aggressive governor for the B.O.J.," said Naoki Iizuka, a senior
economist at Mizuho Securities. "The B.O.J. is the only place where
policy action could take place these days."

Mr. Iizuka and others say that Japan's biggest problem is a lack of
strong political leadership on economic issues. They say Prime
Minister Fukuda, a soft-spoken party insider, has failed to articulate
a clear vision of Japan's economic direction.

At the same time, the government is widely thought to be hurting the
economy with a series of bungled policies, including the sudden
introduction of a strict new building code last summer that sent
housing starts plunging 40 percent.

"There is no leadership, no economic focus," said Jesper Koll, an
economist who heads the Tokyo office of a hedge fund company,
Tantallon Capital Advisors. "Then there are these screw-ups, which are
a huge shot to confidence."

--
Yoshie
<http://montages.blogspot.com/>