Deflation is a "cancer" eating at Japan, and policy makers must quickly resolve the bad loan problem if the country wants to remain a major force in the global economy, White House economist Glenn Hubbard said.
In a public rebuke reminiscent to that given by US Treasury Secretary Paul O'Neill during a January visit to Tokyo, Hubbard said Japan can't rely on a US recovery to pull the economy out of its third recession in a decade.
"The price of inaction is high," Hubbard, the chairman of US President George W. Bush's Council of Economic Advisers, told reporters in Tokyo. While a US recovery gives Japan "a bit of breathing room," it is only a "band aid" solution, he said.
Japanese Prime Minister Junichiro Koizumi's government late last month approved measures aimed at tackling deflation, including using the state-run Resolution and Collection Corp to buy back loans from banks. Still, the US may seek more action sooner to stop Japan's economic woes hurting other economies in Asia and around the world.
It will be difficult for Japan to ``be a major player on the world stage without a healthy economy,'' said Hubbard, who met with Japan's Economy and Fiscal Policy Minister Heizo Takenaka yesterday.
While Bush embraced Koizumi as a "great reformer" during his visit to Tokyo last month, administration officials have been openly critical of Japan, discarding an early promise not to scold leaders for failing to pull the world's second-biggest economy out of an 11-year slump.
During his January visit, O'Neill said it was clear past policy prescriptions -- relying on exports and "endless" public works for growth -- had failed. He also attacked Japan's attempts to weaken the yen, saying it was an ineffective policy tool.
Hubbard repeated that message yesterday, saying tax cuts would be a better way of tackling inflation than more government spending.
He also warned against manipulating markets, suggesting he does not approve of the restrictions Japan has placed on investors who seek to profit from trades betting share prices will fall, a practice known as short selling. The tighter restrictions have helped fuel a 25 percent rally in the benchmark Nikkei 225 stock average the past six weeks.
"I would indicate some concern and some worry that the Japanese government not take steps to interfere in the market's ability to send signals, but rather think about underlying fundamentals," said Hubbard. "It wouldn't be wise to use regulatory means to artificially prop up asset markets."
The February anti-deflation plan disappointed many analysts, who said it didn't go far enough to reverse a 2 1/2 year slide in prices.
The measures contained no new pledge to inject funds into lenders, except in times of crisis, and no action to spur consumer spending.
Koizumi has said the government needs to tackle ?36.8 trillion in loans (US$281 billion) that aren't being repaid in order to get banks lending again and counter deflation. Analysts say bad loans may be five times this figure.
``The measures were adopted to avert any potential financial crisis before the end of March,'' said Masaaki Kanno, chief economist at JP Morgan Securities (Asia) Ltd. ``Tax breaks and more government spending are needed to break out of deflation. Monetary easing by the Bank of Japan is meaningless,'' he said.