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Monday, Oct. 28, 2002

JAPANESE PERSPECTIVES

Critically ill Japan can't depend on assistance from G7 doctors


Japan's economic woes and North Korean issues, including the abductions of Japanese nationals and Pyongyang's nuclear weapons program, will be the two main topics in the extraordinary Diet session that opened on Oct. 18.

I would like to discuss my personal views on the economic tasks facing the administration of Prime Minister Junichiro Koizumi.

The statement released by the Group of Seven finance ministers and central bankers in Washington in late September offered some clues to the current state of the world economy.

Although the G7 meeting drew attention to how they would deal with the worldwide stock market slump, I did not sense any strong leadership from the major economies when I read their statement.

One feature of the statement is that the participants' intentions were left unclear.

While acknowledging that a modest recovery is continuing, the G7 members confirmed the existence of risks but avoided going into specifics, noting only that they would keep up their guard and maintain policy coordination.

The major economies also made few new commitments at the meeting.

Instead, they filled the statement with several expressions stating that they "urge" developing countries to take steps to fix their external vulnerabilities, or "welcome" such and such measures.

This apparently shows that the economic power of each G7 nation is waning.

The statement also mentions technical issues that are normally not discussed in such high-level conferences.

One such issue was the "collective action clause on sovereign contracts." This is apparently a reference to the seriousness of the debt problems in developing areas, especially Latin America.

The G7 members also noted that more than 160 countries and regions took measures against the funding of terrorist activities, reporting that $110 billion in assets had been frozen.

But this figure seems extremely small, given that the United States alone incurs a current account deficit of more than $400 billion a year. This shows how difficult it is to track down and freeze terrorism-linked assets.

All these indications suggest that each of the major industrialized nations is too preoccupied with domestic problems to jointly tackle international issues.

While top-level policy dialogue is, of course, important, the result of the G7 conference indicates that the world cannot expect much from the major powers in terms of economic action.

Given the condition of the global economy, what are the prospects for Japan?

Our nation is like a patient suffering from both cancer and diabetes at the same time: bad loans and an alarming fiscal deficit.

For years, the government has put off tackling the two problems, letting the patient's condition advance to such a critical state that surgery can no longer be postponed.

Nonperforming loans are a problem for both those supplying funds and those in need of them. Disposal at financial institutions must be combined with measures to improve the competitiveness of the borrowers. This means structural and taxation reforms.

Calls are mounting for the government to introduce fresh fiscal and monetary steps in the Diet during the current session, amid widespread concern that accelerating loan disposal will intensify deflationary pressures. But to expect that monetary and fiscal steps alone can cure the problem of falling prices is like crying for the moon.

The current price trend in Japan is merely reflecting the process of bringing Japan's prices, which are still relatively high compared with the rest of the world, closer to the global average.

But while price declines are becoming a problem in the United States as well, it is widely recognized there as disinflation, caused by global oversupply.

This is a phenomenon common to all industrialized economies that compete with developing economies, not something unique to Japan.

As I mentioned in my previous article (Japanese Perspectives, Sept. 23), if a combined index reflecting Japan's consumer prices, unemployment rate and annual rate of stock market decline is compared with identical indexes for Europe and the United States, Japan's problems are less serious.

Critics charge that Koizumi is only trying to impose pain without presenting a scenario for future recovery. But leaving the cancer unattended and giving sugar (such as more public works spending) to a diabetic patient will only make matters worse.

Rising bankruptcies will pain the nation like cancer, but the danger of diabetes (the fiscal deficit) is that the patient (or the "resistance force") is unable to recognize the fact that the nation's finances are in a state of virtual collapse.

The fact that Japan's stock prices remain in a slump, despite the recent rally in U.S. shares, illustrates how worried the market is about signs of receding fiscal discipline.

If the government starts tackling the nation's economic woes in earnest, the world will likely see Japan in a different light, which might prompt rating agencies to upgrade Japanese government bonds and investors to pour funds into Japanese stocks.

Koizumi should maintain his stance that there will be no economic revival without reforms. The recent Cabinet reshuffle has enabled him to accelerate his drive to cure Japan of its diseases, and the ongoing Diet session will be a key test of his resolve.

Teruhiko Mano is an adviser to Tokyo Research International Ltd.


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