'Mr. Yen' warns of further subprime credit woes

by Yasushi Azuma

Kyodo News

Japan and the other Group of Seven economic powers should remain vigilant against a possible aggravation of the credit crunch stemming from the U.S. mortgage loan problem as its impact on the real economy is still unknown, according to a former senior Finance Ministry official.

“The subprime mortgage loan problem is much more serious than widely thought in Japan, although optimism is growing here as Japanese financial institutions incurred few losses,” Eisuke Sakakibara said in a recent interview.

Sakakibara, who was known as “Mr. Yen” for his influence on currency markets when he was vice finance minister for international affairs from 1997 to 1999, said, “What we are witnessing could be the kind of adjustments that occur once in some 10 years, similar to the financial currency crisis in 1997-1998.”

He said global financial markets have restored stability to some extent but warned that markets may face more commotion if U.S. housing prices plunge.

“We should not make any prejudgment on the impact of the problem on the real economy,” he said.

The issue is expected to dominate discussions at a one-day meeting of finance ministers and central bank governors from Britain, Canada, France, Germany, Italy, Japan and the U.S. on Friday in Washington.

Sakakibara said the G7 nations should call on hedge funds to increase transparency by enhancing disclosure to the same degree as ordinary commercial banks.

Euro-zone members, particularly France and Germany, are calling for tighter controls on hedge funds and rating agencies on the grounds that lax ratings on securitized products are partly to blame for recent turmoil in global financial markets triggered by the U.S. mortgage problem.

But the United States and Britain are reluctant to accept such proposals as they would run counter to the free market mechanism.

“I’m not saying activities of equity funds themselves are bad, but we should ask hedge funds to disclose information such as who are their main investors,” Sakakibara said.

The euro-zone members sought tighter regulations on hedge funds when finance ministers and central bank governors from the Group of Eight nations held a one-day meeting in Potsdam, Germany, in May. The G8 is the G7 plus Russia.

However, opposition by the U.S., Britain, Japan and Canada foiled the attempt by the euro-zone members.

Touching on criticism of widespread use of securitization in financial instruments, Sakakibara said investors should realize that they cannot completely hedge risks even with such highly developed financial products.

Sakakibara believes the turbulence in global financial markets stemming from the subprime loan problem could bring an end to the recent view that hedge funds are spearheading global markets.

But he said that although the world has learned some lessons from the latest market chaos, markets will repeat the same mistakes.

Noting that the recent turmoil was triggered by a bubble in the U.S. housing sector, Sakakibara said, “Despite ongoing risk reassessment, markets will create another bubble again and experience its bursting.

“But the authorities cannot stop this unless we are in a socialist economy,” he said.