Japan tried to keep a low profile at the recent meeting of Group of Seven finance ministers in Halifax, Nova Scotia. However, the United States insisted that Japan take more steps to revitalize its economy.
The U.S. officials taking part in the G7 meeting avoided spelling out concrete measures that they deem necessary for Japan to take, since such an action could be construed as an interference in Japan’s domestic affairs.
But the real intentions of the White House must have been made known to the government of Prime Minister Junichiro Koizumi. This is apparently behind the move by Finance Minister Masajuro Shiokawa to order a freeze on personnel transfers at the ministry.
The U.S. has been urging Japan to introduce tax reforms that will contribute to economic growth over the short term. However, Finance Ministry officials and the government’s Tax Commission oppose such reforms, calling instead for a tax increase. Such a collision of opinion between the two sides appears to be intensifying.
At this moment, discussions on economic policies, including antideflation measures, are making little progress. This situation has discouraged many foreign investors, triggering recent falls in the Nikkei average on the Tokyo Stock Exchange.
Many investors remain bearish on U.S. stock market prospects, due to concerns over the Middle East and sluggish corporate profits, and people continue to worry about a possible sharp plunge in share prices. An excessive fall in the stock market could accelerate depreciation of the dollar, a result undesirable for the U.S. government.
Theoretically, there is room for central banks of other major industrial nations, including the European Central Bank and the Bank of Japan, to ease their policies to halt a sharp fall of the dollar.
However, the ECB has no intention to change its monetary policy and instead condones the rise of the euro. That leaves only the BOJ to introduce additional monetary easing.
While the Finance Ministry will probably continue to order yen-selling market intervention, government pressure on the BOJ for additional monetary steps, to increase outright purchases of Japanese government bonds, is expected to intensify day by day.
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