Hashimoto Vows ‘Drastic’ Measures to Lift Economy
Hope struggled with skepticism here Thursday as Prime Minister Ryutaro Hashimoto vowed to take “drastic” measures to revive Japan’s economy and purge its festering bad debts. But wary investors wondered whether a government they see as dithering and ineffectual will deliver on its latest promises.
The Japanese stock market soared 4.4% and the yen rose to 136.7 to the dollar following the U.S. announcement Wednesday that it had intervened to stop the freefall of the Japanese currency. The move was intended not only to bolster Japan but to keep China from a competitive devaluing of its yuan--a sign of China’s growing economic clout that has not escaped notice in Tokyo.
Deputy U.S. Treasury Secretary Lawrence Summers arrived here late Thursday and went straight to dinner with Eisuke Sakakibara, the Japanese Finance Ministry official better known as “Mr. Yen.” Summers was to hold emergency talks with other senior Japanese officials today.
Although Hashimoto denied any quid pro quo, the talk of Tokyo was about just how much real Japanese reform Summers and his boss, Treasury Secretary Robert Rubin, would manage to extract in exchange for the U.S. rescue of the yen.
“I don’t think people as smart as Bob Rubin and Larry Summers would have taken this risk unless they thought there was some real prospect of a policy shift here,” said Matthew Goodman, a former Treasury official who is now director of government affairs at Goldman Sachs Japan.
“If they [the Japanese] don’t deliver, that’ll be a real problem, for Japan and the rest of the world,” Goodman added.
Japanese and Western analysts said the United States is likely to push for more concrete plans to root out the bad loans held by Japanese banks, permanent cuts in personal income taxes, and perhaps other measures to get Japan’s economy moving again.
Late Wednesday, Japan’s Parliament approved a $124-billion package of temporary tax cuts and public works spending. The package, which is equivalent to 2% of gross domestic product, is expected to revive the economy later this year, but most economists think the effects will be short-lived unless accompanied by the fundamental structural reforms that Hashimoto is now promising.
On Thursday, Hashimoto said he would like to lower personal income tax rates and slash corporate tax rates to international levels “as soon as possible, within three years.”
The pressure on Japan to do more, and faster, will be ratcheted up still further on Saturday when deputy finance ministers from the Group of Seven industrialized nations, plus financial officials from seven other Asian countries, meet in Tokyo.
Japan’s ruling Liberal Democratic Party is not likely to agree publicly to some of the most painful restructuring--such as forcing the closure of debt-ridden banks or construction companies--before the crucial July 12 parliamentary elections.
Yet it is unclear whether markets will wait that long before resuming the selling frenzy that pushed the yen to an eight-year low of 146 to the dollar earlier this week.
Analysts have plenty of suggestions, many politically unacceptable, about what to do. They range from cutting the consumption tax to 3% from 5% to boost consumer spending, to “large-scale, and I mean really large-scale, debt forgiveness” to unlock the paralyzed real estate market, in the words of Goldman Sachs chief strategist Kathy Matsui.
But there are no easy economic fixes, said a Bank of Japan official, because many of the treatments being prescribed for Japan in the long run would make the current recession even worse in the short term, and vice-versa.
Drastic bank restructuring, for example, would create a severe credit crunch that would kill off plenty of healthy companies together with the unprofitable, debt-ridden firms that probably deserve to die, he argued.
Meanwhile, some are skeptical that American economic prescriptions will be in Japan’s best interest. “America doesn’t care what happens to Japan,” said Harumi Ichiki of the Sumitomo Research Life Institute in Tokyo. “They intervened in the market to protect their own stock market, while trying to make it seem as though they had intervened on behalf of Japan. However, what America really wants is to ensure a soft landing for China.”
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Chiaki Kitada in the Times’ Tokyo bureau contributed to this report.
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