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Monday, Feb. 25, 2008

JAPANESE PERSPECTIVES

G7's changing world and the need for microeconomic steps


The Feb. 9 meeting of the Group of Seven finance ministers and central bank chiefs — the first one held in Tokyo in eight years — adopted a statement recognizing that the global economy is facing more challenging and uncertain circumstances.

The statement underlined the G7's commitment to surveilling global economic conditions and ensuring stability and growth, while calling for either concerted or individual actions by the G7 members.

But the meeting failed to produce any agreement on immediate steps — an outcome that revealed just how tightly the hands of the G7 nations have been tied.

One thing hampering their efforts is the dilemma the global economy now finds itself in. Although monetary easing will be needed to address the recession fears being kicked up by the subprime-mortgage crisis in the United States, the very cause of the mess and the global surge in oil and other commodities has been excess worldwide liquidity — a problem that will require monetary tightening to correct.

Another factor is the diverging political circumstances of the G7 nations and the mix of policy priorities that have emerged.

In the United States, for example, which is facing one of its most important presidential elections ever in November, the people are putting priority on the economy, which appears headed for more instability.

Europe meanwhile is placing emphasis on fighting the inflationary pressures being created by climbing oil and grain prices.

Japan, with its huge public debt and ultra-low interest rates, has few monetary or fiscal policy options at its disposal and must work with a divided Diet that is making it more difficult for the government to pass legislation.

Another factor limiting the capabilities of the G7 is the progress of globalization, which has reduced the dominance of advanced nations and increased the power of the leading developing countries.

Russia, for example, joined parts of the G7 meetings in Tokyo, while China, Indonesia and South Korea were invited to the "extended" meeting held on the sidelines of the conference.

Countries like China, India and Indonesia, which have large populations and large economies in absolute terms, are acquiring a growing influence on the world economy. But their growth is causing other problems, too.

Despite their growing size, per capita GDP remains low, and they have not fully opened up their economies, which makes it difficult to contribute effectively to the global economy.

Some people suggest that these highly populated countries should be allowed to join the G7, but I think that is premature, especially given that they cannot take responsibility for global economic management when they are lagging in their own economic liberalization drives.

Another problem is that growth in highly populated countries has caused a decoupling of corporate earnings from wages in the industrialized nations.

The chances of a Japanese blue- or white-collar worker getting a hefty pay raise, for example, is slim because wage levels here are much higher than in neighboring countries. Unlike the closed labor system Japan operated in during the early postwar years, Japanese companies today have the luxury of being able to hire workers either from Japan or from other countries.

Finance Minister Fukushiro Nukaga, who chaired the G7 conference, said later that the member countries should try to learn from Japan's efforts to survive the bubble economy's collapse in the early '90s. I think what Nukaga was trying to emphasize was the importance of using microeconomic measures, given the G7's struggle to adopt a concerted macroeconomic strategy.

After the bubble imploded, Japan kept interest rates at extremely low levels, but it is doubtful that such unorthodox monetary tactics had any significant impact on supporting the economy. What actually worked in reviving Japan's economy was microeconomic steps — such as injecting public funds into individual banks that were suffocating under piles of bad loans.

What is troubling in today's more globalized economy is that the subprime loans that were extended by U.S. financial institutions were securitized and scattered around the world, making it difficult to find exactly where bad loans are and what the scale of the mess is. It is this uncertainty that has prolonged the turbulence in the financial markets.

The damage from the credit crunch is gradually materializing in the balance sheets of financial institutions and other companies worldwide. What financial authorities need to do is quickly locate these caches of problem loans and take appropriate microeconomic steps in each country to extinguish the fire.

Teruhiko Mano is a professor at Seigakuin University Graduate School.


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