Wall St. crisis threatens Japan

Wall St. crisis threatens Japan

Yoshikuni Sugiyama, The Daily Yomiuri, Asia News Network, Tokyo

In Japan, economists appear to be divided into two groups
concerning their interpretation of a report issued by the U.S.
Federal Reserve Board in June. Written by Fed staffers,
"Preventing Deflation: Lessons from Japan's Experience in the
1990s," is a study of the bursting of Japan's economic bubble
that also describes how monetary policy may be utilized to guide
the economy to a soft landing, with the aim of preventing the
bursting of the U.S. stock bubble.

Those economists and bureaucrats critical of the Bank of
Japan's monetary policy have interpreted the report as indicating
that the bursting of Japan's economic bubble was due to the
central bank's failure to take "bold" easing measures. Such
critics have utilized the U.S. study as powerful ammunition with
which to attack the bank's handling of the economy.

However, another interpretation has focused on the threat of
the bursting of the U.S. stock bubble. A researcher from a
private sector think tank said: "The report indicates that the
U.S. monetary authorities are very afraid of the bubble bursting.
They're worried that the United States will suffer the same
plight as Japan."

The researcher said the thinking of the U.S. authorities was
dominated by the possibility of the U.S. bubble bursting.
Concerning such a prospect, the researcher warned of the damage
Japan would suffer if the nightmare of the U.S. authorities
became a reality.

The number of those who have adopted the second interpretation
has been growing in the wake of the recent plunge in prices of
shares listed on the New York Stock Exchange.

An industry insider said glumly, "The latest plunge in stock
prices has demonstrated that even (Fed Chairman Alan) Greenspan's
magic couldn't prevent the collapse of the bubble."

Nobuo Yamaguchi, chairman of the Japan Chamber of Commerce and
Industry, expressed apprehension last Monday about the effect the
sudden plunge in U.S. stock prices would have on the Japanese
economy.

Speaking at a news conference, Yamaguchi said: "The fall in
stock prices is serious. It will have a major negative impact on
banks in their disposal of bad loans."

Hiroshi Okuda, chairman of the Japan Business Federation, also
expressed his concern Thursday that the Wall Street slump was a
"serious crisis" for Japan.

While business leaders appeared apprehensive, government
figures seemed less concerned. Heizo Takenaka, state minister in
charge of economic, fiscal and IT policy, said he did not think
falling U.S. share prices would have any serious effects on
Japan.

However, the substantial drop in New York stock prices has
brought a new dimension to Japan's economic situation, with the
economy already suffering from deflationary pressures.

The latest development on Wall Street has rocked the Japanese
government's rosy scenario of an economic recovery that was
devised prior to the puncturing of the U.S. stock bubble. While
the economy has bottomed out, there are fears that it could not
only fail to recover, but also suffer a double-dip recession.

Nevertheless, Prime Minister Junichiro Koizumi has repeatedly
said there is no "quick fix" for the ailing national economy.

It is a matter of concern that in Kasumigaseki -- the center
of government -- the general consensus appears to be acceptance
of the prime minister's stance.

A bureaucrat said the nation's "financial and monetary
policies have reached their limits," warning that the problems
would only be compounded if the government took further measures.

The official appeared to believe that the best policy for the
government at present was to let matters take their course.

However, the government does not appear to have the luxury of
taking this approach in view of the fact that the turbulent U.S.
economy has changed the whole scenario. If the United States
suffers an economic meltdown, there would be fierce deflationary
pressure on both Japan and the global economy.

Under the circumstances, Koizumi must devise policies to
combat deflation and prevent the economy from suffering the
fallout from New York.