The US is not convinced that Japan's popular new prime minister will turn the economy around
Junichiro Koizumi is riding a wave of popularity that many former Japanese prime ministers could only dream of. The adoration, based on optimism the 59-year-old reformer will revitalise Japan's economy, has even boosted his Liberal Democratic Party's support rate.
Foreign investors also seem to be giving Japan's new leadership the benefit of the doubt. Laurence Meyer, however, one of the world's brightest and most influential economists, can't help but worry about Japan's economic outlook.
In fact, the Federal Reserve governor seems downright anxious about the nation's prospects and what they mean for the rest of the world.
'The renewed weakness of the Japanese economy, coming at a time when macro policy options are limited, is putting additional pressure on the Japanese banking and financial system,'' Meyer told an investment seminar in Edinburgh, Scotland. 'There is a danger that a price will be paid ' in Japan and globally ' for the failure to move decisively to resolve these problems.''
Not much ambiguity there. Meyer is but the latest US policymaker to voice concern about Japan's economy. Not criticism, per se, but anxiety about the strain Japan's 10-year malaise is putting on the global financial system at a time when economies are interconnected as never before.
Fed Chairman Alan Greenspan made similar comments in April, while Treasury Secretary Paul O'Neill has spoken about the importance of Japan returning to a path of stable growth.
When the US was booming, Japan's troubles somehow seemed less menacing. Now that the US economy has slowed and Japan appears to be deteriorating anew, dissatisfaction has given way to fear. It 'has an effect throughout the world because you cannot have the second largest economy in the world essentially stagnant without impacting the rest of us,'' Greenspan told the Senate Finance Committee in April. The 'turgid performance'' of the economy, he said, 'has created a significant element of dampening in world economic activity'' and 'I should certainly hope they would get their economy back on the track they've been on'' in past periods.
There's little hope for that in the near future. All told, there's little, if any, evidence that Japan's economy is turning up.
Making matters worse, global growth is waning and placing additional downward pressure on Japan's economy. 'Because macro policy options are more limited in Japan, the effects of adverse common shocks or spillovers from other countries will be larger than they would be if the Japanese had more flexibility to act,'' Meyer said.
The US, for example, has slowed to less than half of the 5% growth rate seen in 2000, reducing demand for Japanese exports. The economy probably grew in the first quarter at an even slower pace than initially estimated, say analysts polled by Bloomberg News.
Trends in Southeast Asia also are posing risks. Indeed, there has been considerable progress since the Asian financial crisis swept through the region in 1997 and 1998. Emerging market economies have moved to flexible exchange rates, and many have higher official currency reserves.
The region's economies also have current account surpluses instead of deficits and are less reliant on short-term foreign borrowing.
'But unfinished business remains, specifically a failure to deal decisively with financial sector weakness,'' Meyer cautioned. 'Thus, a sharper slowdown among these countries could trigger further financial difficulties.''
Trouble is, Tokyo's options to boost growth are limited. Past efforts to boost the economy with government money have been funding by bond issuance and there's already a glut of Japanese bonds outstanding.
Besides, Koizumi wants to limit the amount of new government bond issuance. And the Bank of Japan has little latitude to cut short-term rates, which are at 0%. All that's left is a weaker yen to boost exports.
A falling yen, however, won't go over well with neighbouring economies that compete with Japan in goods markets.
In the short term, the onus is on the BOJ to continue boosting Japan's money supply.
'The economy remains weak and further monetary stimulus would be welcome,'' Meyer said. 'This is especially true given concerns about the sustainability of their fiscal position: very large deficits and a very high and rising ratio of government debt to income. A spillover from the US and the global slowdown will therefore have a sharper effect on Japan, to the extent that its monetary policy is unable to respond.''
So far, Japanese also are giving Koizumi's team the benefit of the doubt. Koizumi's popularity has boosted the LDP's support rate to a near two-year high, according to a poll by the Japanese Times newspaper.
For Japan's sake, let's hope Meyer's pessimism about the economy is proven wrong. If not, the world's second-largest economy may continue to stagger along for some time.
44% outperformed up from 28%
Celebrated anniversary on 21 April
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Equity release panel
Speaking at PA360