Japan should clear its mountain of bad loans and end deflation to revive its stagnant economy, rather than rely on failed policies of building roads and lowering the yen, US Treasury Secretary Paul O'Neill said yesterday.
The public rebuke is a sign of the growing frustration within the George W. Bush administration over the persistent lack of growth in the world's second largest economy, and mounting concern over Japan's inability to address deep-rooted problems.
It also suggests US officials have discarded an early promise not to continue their predecessor's scolding of Japan's leaders for failing to pull the economy from an 11-year sump.
PHOTO: AFP
"The objective and the measure of success is Japan growing its gross domestic product again," O'Neill told the National Press Club. "It is clear that the policy prescriptions of the past -- export-led growth and endless public works projects -- can't work."
Quiet diplomacy was replaced by a demand for swift action as O'Neill told Prime Minister Junichiro Koizumi that if he was serious about fixing the economy he should set a growth target and form a strategy to meet it.
"To accomplish the goal it will be necessary to formulate specific policies and to assign to each policy its expected contribution to the goal -- along with the expected timetable to fully achieve the policy," he said.
He gave no target himself, although he recently said Japan's economy has the propensity to grow at an annual rate of 2 percent to 3 percent. Having started to shrink again 14 months ago, it will contract 1 percent in the fiscal year that ends March 31 and will show no growth next fiscal year, according to Japanese government estimates.
After lowering interest rates to zero and pushing the public deficit to 130 percent of GDP through government spending, Japan has largely exhausted conventional methods of sparking a rebound. Since September, officials have instead focused on lowering the value of the yen, in the hope that will lift exports and therefore growth.
The currency, which fell 13 percent against the dollar last year, the steepest annual drop since 1979, has slid more than 12 percent since Sept. 1 to its lowest in three years. Japan sold US$24 billion worth of yen in September and then welcomed its subsequent decline, even though Finance Minister Masajuro Shiokawa said Tuesday that the government was not trying to steer it lower.
O'Neill dismissed manipulating foreign exchange in the interest of an economy as ineffective, claiming "the weight of historical evidence shows that those who have tried to fix underlying economic problems with protectionist measures -- artificially depreciating the currency is one of those -- actually weaken the economy."
Nothing he had heard from Koizumi suggested the Prime Minister "believes that tampering with foreign exchange rates is a realistic element of a reform agenda," O'Neill said.
While praising Koizumi, who became leader in April, for promising reform, the Treasury secretary called for "decisive action to solve difficult problems." He cited paring non-performing bank loans, increasing price competition and countering deflation as the "three areas I believe may help unlock the full propensity of Japan's economy."
There are an estimated ?151 trillion in bad loans on the books of the nation's banks.
Koizumi has pledged to clean up ?13 trillion held by the biggest banks within two years. Japan's eight largest banks wrote off a combined ?2.3 trillion in problem loans for the six months ended September. Still, their outstanding bad loans expanded 14 percent to ?20 trillion between March and November and some analysts say the true total of bad loans may be closer to ?300 trillion.
"A financial sector that is healthy and efficiently allocates capital to its most productive uses is critical for an economy to reach its full potential," O'Neill said.
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