Finance ministers and central bankers from the Group of Seven (G-7) advanced industrialized nations issued a declaration on Saturday that called on Japan to take additional steps to stabilize its financial system and to loosen its money supply. They also affirmed that the fundamentals of the U.S. economy remain strong in spite of a recent slowdown.
The G-7 economic conference in Palermo, Italy, was the first to be held since the inauguration of the Bush administration, so considerable attention was focused on the type of demands that U.S. Treasury Secretary Paul O'Neill would make upon Japan. O'Neill avoided any comments that were directly critical of Tokyo, and instead suggested that Japan should consider the measures that it needs to take on its own.
More than 10 years have passed since the bursting of the financial bubble, but Japan's efforts to reform its economic structure, fiscal policies and financial system have all been half-hearted. The world no longer expects Japan to serve as a locomotive for the global economy.
At this time, the best way for Japan to make a global contribution is to steadily implement measures that will improve the performance of its own economy.
The Bush administration has already sent out signals that it is willing to do its part to fulfill its global economic responsibilities.
The U.S. economy, which has been expanding since March 1991, is expected to experience zero or negative growth in the first quarter of 2001. U.S. President George W. Bush has pledged to implement a massive tax cut, and the U.S. Federal Reserve Board has slashed interest rates to fight a recession.
Japan, too, is not standing still. At the G-7 conference in Palermo, Finance Minister Kiichi Miyazawa stressed that Japan was taking all possible steps to spark growth and to complement the fiscal 2001 budget, which is heavily weighted toward economic stimulus policies. And on Feb. 9, the Bank of Japan announced that it was cutting the official discount rate and adopting a new lending system.
None of the economic officials who gathered in Palermo urged Tokyo to pass additional fiscal spending measures because Japan's fiscal situation is now the worst among the G-7 nations.
But Japan's fiscal hands are tied because it has neglected fiscal reform for a long period of time.
The first thing that Japan should do is rebuild its financial sector. Under present conditions, any attempt to expand the money supply would have a limited effect on overall business activity because corporate managers have gotten cold feet, and funds cannot flow smoothly to the private sector because banks are not carrying out their function as financial intermediaries. The fact that the Japanese financial system has been on the brink of a meltdown for quite a while also impedes international capital flows.
Japan needs, above all, to approach the task of economic reconstruction with a sense of commitment so that it can prevent foreign pressure from distorting its economic policies.
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