The New York Times-20080125-Frailty of U-S- Finances Has Japanese Agonizing
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Frailty of U.S. Finances Has Japanese Agonizing
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.
[Illustration]PHOTO: Prime Minister Yasuo Fukuda, cheering with other Liberal Democrats last week, is regarded by some as a soft-spoken party insider who has not offered a vision of Japan's economic direction. (PHOTOGRAPH BY KAZUHIRO NOGI/AGENCE FRANCE-PRESSE -- GETTY IMAGES)