In Japan, a Sense of Disarray as Economic Confidence Crumbles

Policy confusion gripped Japan today as Finance Minister Kiichi Miyazawa apologized for warning of a looming fiscal collapse and Economics Minister Taro Aso floated the idea of yet more public spending to save the economy.

To compound the muddle, Trade Minister Takeo Hiranuma contradicted other government officials on whether Japan should actively drive the yen’s value lower to boost the economy.

The sense of disarray came as the clock ticked down to the resignation of unpopular Prime Minister Yoshiro Mori. Newspapers said he could state his intention to resign as early as today.

With business hurting badly due to slower growth in the United States and Asia and amid crumbling confidence at home, Aso said the government would downgrade its official assessment of the economy this month on the heels of a raft of recent dire data.

Aso also said he believed the economy still needed the kick of public spending. But that view is increasingly controversial. Since 1992 Japan has enacted 10 extra budgets totaling more than $1 trillion to try to lift the world’s second-largest economy out of its deepest downturn since World War II. In the process, Japan’s public debt has soared to more than 500 trillion yen ($4.2 trillion), or 130% of gross domestic product.

By contrast, U.S. government debt, at $5.7 trillion, is 57% of U.S. GDP.

The ocean of red ink triggered an outburst Thursday by Miyazawa, who told parliament that Japan was on the verge of fiscal collapse and that fiscal reforms could not be delayed. Yet 24 hours later Miyazawa apologized for his bluntness. “I thought I was saying what I had always said, but the wording was inappropriate. I apologize,” he said at a news conference.

Miyazawa’s remarks Thursday drove the yen to a 20-month low of 120.43 per dollar, but it strengthened to 119.47 in Tokyo today.

The Nikkei 225-stock index fell 0.6% on Thursday, but was nearly flat early today at 12,637. The index last week fell to 15-year lows.

Miyazawa’s backtracking echoed an episode last month when he suggested Japan would eventually have to increase its consumption tax as part of broader fiscal reforms. He retracted the remark the following day amid a storm of criticism.

Investors have low policy expectations ahead of an election to the Upper House of parliament in July, but they had read Miyazawa’s warning as a sign that the dominant political party, the Liberal Democratic Party, was tilting away from conventional pump-priming and preparing gingerly to embrace much-needed corporate and financial restructuring.

Financial Services Minister Hakuo Yanagisawa has been spearheading the campaign within the government for urgent steps to cleanse banks of more than $250 billion in bad loans and to cut off credit to non-viable firms, even at the risk of bankruptcy.

But Aso cautioned that Yanagisawa faces tough opposition within the government. Aso said he backed the need for structural reforms but warned of an uproar if the banks were to write off their bad loans all at once. “We should think about the possibility of increasing a credit crunch and we should do that with caution,” he said.

The government was expected late today to unveil a package of measures aimed at propping up the economy and the sagging stock market.

“What the market would like to see from the package is not any more of the old medicine. We don’t want to have another series of fiscal stimulus packages announced, any sort of suggestion of direct intervention,” said Dick Beason, strategist at UBS Warburg in Tokyo.

“The market would like to see things that deal with fundamentals--the structural problems--as opposed to quick fixes,” he told Reuters Television.

One swift remedy for Japan’s export-dependent manufacturers would be a further decline in the yen, which would make their goods more competitive in the United States and other foreign markets.

Here, too, confusion persisted about the government’s policy intentions. Miyazawa said this week he was happy to see the yen decline of its own accord but did not want to push it. Yet Trade Minister Hiranuma, mentioned as a possible replacement for Mori, sent a different message. “A fall in the yen to some extent is tolerable unless it overshoots,” he said.

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Debt Mountain

Japan’s total outstanding government debt has soared past 500 trillion yen ($4.2 trillion), from 330 trillion yen in 1996, in the wake of a series of government bailout packages for the economy.

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Japanese government debt, in trillions of yen

September 2000: 511 trillion yen

Source: Japan Ministry of Finance

Researched by NONA YATES/Los Angeles Times