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The G7 finance ministers and central bank governors were uncharacteristically silent on the stock-market crash in New York — the worst ever in terms of single-day point losses. Instead, their statement, issued last weekend, emphasized that the world economy is improving and that U.S. growth remains “very strong” with inflation well under control.

On exchange rates, the communique made no specific reference to the yen, departing from the previous two G7 statements of last September and this January, which expressed shared concern about the Japanese currency going too high. It said merely that exchange rates among major currencies should reflect “economic fundamentals” such as growth and inflation rates. The omission of the “yen problem” mirrors a G7 judgment that it is improper to single out a particular currency, because the dollar, the euro and other currencies also have their own problems.

The crash in the New York market has spooked equity and exchange markets around the globe. In Tokyo on Monday, the Nikkei stock average nose-dived, posting its fifth-largest one-day point loss, while the dollar dipped against the yen. Major bourses, here and elsewhere, thus reacted sharply, plunging and then rebounding in the first two days of this week.

Referring to Japan’s weak economic recovery, the statement called again for continued efforts to achieve growth driven by domestic demand, including a continuation of the zero-interest-rate policy. Signs of self-sustaining growth are now increasingly visible in some areas of private demand, such as capital investment. Steady, hands-on efforts are required to nurture these tender buds of recovery toward enduring growth.

That is easier said than done, however. With private corporations restructuring the hard way and with the government pushing for deregulation, the path to a lasting recovery looks thorny. Growth may rise moderately, but unemployment will probably stay high. Consumer spending — which takes about 60 percent of gross domestic product — holds the key. No robust growth can be expected unless consumers begin to loosen their purse strings.

The problem is that fiscal policy is already stretched to the limit. Years of deficit spending since the collapse of the bubble economy have created a mountainous debt burden, which is projected to reach a total of 360 trillion yen by the end of March 2001. Finance Minister Kiichi Miyazawa, elaborating on the communique at a press conference, said achieving private-demand-led growth requires continued fiscal and monetary support. But the deficit-wracked government can no longer provide much in the way of stimulus spending. Mapping out a deficit-reduction program is now a more urgent priority.

What the government can and should do now is to make the most of its available funds. It should support vocational training and self-improvement programs for workers displaced as a result of structural reforms. Subsidizing corporate R&D projects and helping to develop smaller high-tech companies are essential steps.

Prior to the G7 meeting, the Finance Ministry ruled out the need to front-load public-works spending for fiscal 2000 or to compile an extra spending package later in the year, citing the growing signs of a private-sector revival. There is no assurance, however, that the economy will get on the growth path as expected. If it does not, pressure for further stimulus spending will likely increase both at home and abroad.

As for the zero-interest-rate policy, deciding its timing has become even more difficult after the G7 meeting. The current monetary policy has sent domestic funds flooding into U.S. stock and bond markets. This has added fuel to the boom on Wall Street and helped keep U.S. long-term interest rates comfortably low and the dollar relatively stable. The same is true with money flowing into the U.S. from Europe and other regions. The massive influx of foreign funds has also made it possible to finance America’s record-breaking trade and international-payments deficits.

But what if this cycle is suddenly reversed? The scenario is scary. If foreign funds invested in the U.S. begin to leave, the U.S. stock market will go into free fall, and the dollar will also go into a tailspin. Then the U.S. economy — the engine of global growth — will come to a grinding halt, making a “hard landing” with dire consequences for the world economy.

Japan will have to continue walking a tightrope, on both the fiscal and monetary fronts, lest its actions unwittingly trigger such untoward developments. That requires steady, patient efforts toward sustainable private-demand growth rather than mere knee-jerk reactions to the stock-price plunge.

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