WASHINGTON – Japan’s economic situation is expected to be one of the focuses of the upcoming Group of Eight summit, White House economist Glenn Hubbard said Monday.
Hubbard, chairman of the Council of Economic Advisers, also called on Tokyo to carry out corporate tax cuts to revitalize its sluggish economy.
“I think the Japanese economy is definitely a concern for the global economy,” Hubbard said. Japan is growing less than its potential growth rate. So I think it’s important not just for Japan but for the world and the G8 summit that Japanese growth increases.”
The leaders of the G8 countries will gather for two days in Kananaskis, Alberta, beginning June 26. The G8 consists of the G7 — Britain, Canada, France, Germany, Italy, Japan and the United States — and Russia. Economic issues are handled mainly by the G7.
Hubbard believes the Japanese economy can grow more rapidly if Tokyo were to take appropriate fiscal and monetary policy measures. The Japanese government, meanwhile, anticipates no growth in its economy in fiscal 2002.
Implementing corporate tax cuts at an early date would be “very helpful” in stimulating the Japanese economy, he said.
“I think if there were to be any supplementary budgets, probably the better use would be in tax cuts, particularly cutting marginal tax rates on business activities,” Hubbard said.
The government’s Tax Commission has been reluctant to cut corporate taxes, placing priority on restoring the health of the nation’s deteriorating finances rather than revitalizing its economy.
In late May, the Japanese government declared that the economy had bottomed out. Hubbard, however, believes Japan cannot really expect long-term growth without first ending deflation and accelerating the disposal of banks’ bad loans.
Hubbard called on the Bank of Japan to maintain its quantitative monetary-easing policy and, if necessary, expand it.
While admitting there has been some progress in the disposal of bad loans, Hubbard called on Japan to make a bigger effort to fix the issue, which has long kept the Japanese economy from sustaining brief spurts of economic growth.
“It remains deeply problematic,” he said of the bad loan issue.
Hubbard urged Japan to promote the restructuring of its industries rather than simply fall back on currency intervention to help its exporters.
“Japan’s multinationals remain the envy of the world,” he said. “They’re great. That’s not the problem. The problem is in the domestic economy. It’s hard for me to believe that a pure exchange rate strategy would work, irrespective of its merits or intervention or no intervention.”
In recent weeks, the BOJ has intervened several times to keep the yen from strengthening, apparently to shield export-oriented manufacturers from dwindling yen returns of their sales abroad.
Hubbard also asked Japan to present a clear set of steps for attaining sustainable growth and healthy fiscal conditions, noting this will help the nation gain better ratings for its government bonds.
At the end of May, Moody’s Investors Service Inc. cut Japan’s sovereign-debt ratings by two notches, placing them on par with Cyprus, Latvia and Poland.
Japanese government officials have said the action is unjustified in light of Japan’s economic fundamentals. But Hubbard disagrees, saying, “At issue was just whether or not there were a set of policies for the long-term growth and fiscal sustainability in Japan.”
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