Japan must cure own economic ills to help Asia

Japan must cure own economic ills to help Asia

By Linda Sieg

TOKYO (Reuters): Japan has vowed yet again not to let its woes drag the rest of Asia into more financial turmoil and trigger a global crisis, but analysts say Tokyo must loosen its tight fiscal grip still further to keep that promise.

"At the moment, Japan is the key to stabilizing the region and I think they are beginning to get the message," said Russell Jones, chief economist at Lehman Brothers Japan.

"Japan needs to stabilize its own economy and if it does that, it contributes to solving the Asian crisis," he added. "They are going to be under huge, huge pressure from the United States and the European Union on this."

Hard-pressed Asian markets began the week with further share price slides and currency falls as international negotiators sought to avert an Indonesian debt moratorium, and last Friday's plunge in U.S. share prices highlighted fears that Asian woes would slice global growth.

The Tokyo stock market's key 225-share Nikkei average slid as much as 2.44 percent before recouping some of those losses by midday, when it was down 1.26 percent. But by late afternoon it slipped again, and was down 1.84 percent at 14,719.88.

In Thailand, the baht dropped to a new low against the dollar on regional woes, Hong Kong's Hang Seng stock index slid more than nine percent in morning trade and Taiwan share prices fell in tandem, although shares rose in Jakarta on hopes that talks between Indonesia and the IMF could bring good results.

The United States and Europe, along with domestic business leaders, are urging Japan to take bolder action to get its faltering economy back on a recovery track and prevent it from aggravating the economic turmoil in the rest of Asia.

"I think that Japan's economy affects not only Japan, but the rest of the region and indirectly, the rest of the world," European Union Trade Commissioner Leon Brittan told Reuters on Sunday ahead of yesterday's EU-Japan summit.

"On the macroeconomic side, the Japanese government has taken some measures to reduce taxes and to stimulate the economy and they will no doubt need to consider whether it is necessary to go further in that direction," Brittan said. "That's something the Japanese government will have to consider very carefully," Brittan said.

Prime Minister Ryutaro Hashimoto, who has made fiscal austerity a key policy plank, surprised markets last month with a decision to implement a two trillion yen ($15.1 billion) income tax rebate.

Markets' hopes rose last week that Japan was poised to do more after a ruling Liberal Democratic Party (LDP) executive, Yoshihiro Mori, was quoted as saying Japan should consider making the emergency tax rebate permanent and a Hashimoto aide reportedly told U.S. officials that Japan would take more steps if needed.

Yesterday, Hashimoto told a new session of parliament that he would never let Japan trigger a global depression. He said in a speech that there had been no change in Japan's need for fiscal reform, but added that it must be flexible in adapting to financial conditions and the international economic picture.

Private economists say Japan needs bolder corporate and personal income tax cuts, prompt passage of financial stabilisation measures and more drastic deregulation to prevent Japan from adding to Asian woes and sparking a crisis.

"Japan is about one-fifth of the global economy so the Japanese economy sliding into recession obviously has a direct impact on global growth," said Jesper Koll, chief economist at J.P. Morgan in Tokyo.

"The second concern is that Japan is the world's largest supplier of savings, and if a banking crisis in Japan absorbs those savings, that spells bad news for the globe," he said.

Pressure on Tokyo to act will mount ahead of a Group of Seven (G7) finance ministers' meeting in London on Febr. 21.

"Definitely a major subject (of the G7 meeting) will be fixing the Asian crisis, so Japan should take greater responsibility to fix its problems, which have been caused by its fiscal policy at home," said Susumu Kato, chief economist at BZW Securities Japan. ($1=132 yen)