G-7 Allies Tell Japan to Step Up Reforms

Top economic officials of the United States and its major Western allies stepped up pressure on Japan to do substantially more to spur faster economic growth at home, both to ease the Asian financial crisis and to avoid spawning wider trade deficits abroad.

In a meeting here Saturday, the finance ministers and central bankers said that the measures Japan has taken so far--including a series of modest tax cuts and some initial steps to deregulate its economy--simply are not enough and that Tokyo must cut taxes sharply or increase government spending soon.

The consensus, which surfaced during a daylong session, was expressed in polite diplomatic language in a communique that the group issued after its meeting. But the ministers--including U.S. Treasury Secretary Robert E. Rubin--were far more direct, both inside the session and in public comments.

The Japanese response, however, was noncommittal.

Finance Minister Hikaru Matsunaga told reporters later that Japan has no plans for further tax cuts or spending programs. He said if Tokyo’s policies are evaluated “properly,” there “won’t be criticism that Japan’s economic stimulus is too little.”

The new, more intense diplomatic assault on Japan’s continuing refusal to stimulate its economy came at a session in which the ministers also firmly backed the International Monetary Fund in its handling of the global financial rescue effort for Asia, despite outside criticism of IMF policies.

At the same time, the Group of 7, as the ministerial conclave is known, formally launched a longer-term effort to improve the international monetary system by devising new procedures designed to help avert another financial crisis like the one that erupted in Asia over the summer.

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The ministers also openly warned Indonesia not to adopt a plan to create a “currency board” being promoted by President Suharto’s children to help bolster their state-supported businesses. The ministers cautioned that about $43 billion in international loans that the IMF has assembled might be cut off if the currency board is established.

President Clinton called Suharto late Friday night to drive home that point--the second time in a little over a week that Clinton has telephoned the 76-year-old Indonesian leader to urge him to follow the IMF’s prescriptions.

The IMF believes that the currency board would worsen Indonesia’s slump.

The pressure on Japan to stimulate its domestic economy is not new by itself, but the intensity of Saturday’s entreaties--and the fact that officials of all six of the other countries at the session joined in--marked a visible intensification of the campaign.

With the initial turmoil in the Asian financial markets apparently over--and countries such as South Korea and Thailand now taking firm steps to overhaul their economies--many analysts believe that spurring faster economic growth in Japan is the major remaining step to ensure recovery in Asia.

Japan is by far the largest trading partner of many of the Asian countries that are now in economic trouble, but its economy has been sluggish for years and it cannot buy enough of the region’s exports to help its neighbors out of the recession that the financial crisis has spawned.

U.S. officials are also worried because Japan’s continuing economic problems have depressed the value of the yen, widening the U.S. trade deficit with Japan.

Rubin warned Saturday that the situation poses a “danger of fomenting protectionist pressures” in the U.S.

“Japan needs to very quickly get on track,” Rubin told reporters after the meeting. “Unless something changes [to spur more domestic demand in Japan], our own trade deficit with Japan will go up.”

New figures made public Thursday showed the U.S.-Japan trade deficit widened in 1997.

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The language in the communique was polite but notably more blunt than usual.

“In Japan, [economic] activity is low, and the outlook is weak,” it said. “There is now a strong case for fiscal stimulus to support [increased economic] activity during 1998.”

But officials who took part in the meeting said Rubin was not alone in his push for Japan to do more to jump-start its economy.

Germany’s central bank governor, Hans Tietmeyer, told reporters later that what is needed from Japan “is a financial policy which creates trust.”

Japanese officials say they would face serious domestic political problems if they tried to stimulate their economy.

Prime Minister Ryutaro Hashimoto has traditionally opposed further stimulus, and the issue could complicate approval of a new budget due April 1.

There had been reports recently that Hashimoto’s government might propose a massive new stimulus package after the new budget has been approved by parliament, but Matsunaga said the articles were not true.

Officials said the Japanese made no new commitments Saturday.

Besides the United States and Japan, the Group of 7 includes finance ministers and central bankers from Britain, Germany, France, Italy and Canada.

U.S. Federal Reserve Board Chairman Alan Greenspan had a cold and did not attend. Vice Chairman Alice Rivlin came in his place.

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Along with the other issues, the finance ministers outlined several steps that they hoped to explore for bolstering the international monetary system in hopes of preventing financial crises. The steps included broadening the scope of the IMF and prodding countries to make their economic statistics public sooner.

They also pledged to look for ways to require commercial banks, as well as other investors and lenders, to shoulder more of the losses when financial markets collapse and the IMF has to step in to help bail the countries out. Some fear that expectation of such bailouts encourages lenders to take excessive risks.

The ministers also voiced firm support for the economic reforms prescribed by the IMF--from strengthening a country’s banking system to ending government direction of bank lending--and urged financially troubled Asian countries to follow them.

Officials said approval of the program for bolstering the international monetary system marked the first step in a longer-term plan that the ministers hope to push through the annual seven-nation economic summit, to be held in Birmingham, England, in the spring.