[OPE-L:5135] Re: the capital-form and the state

From: Rakesh Narpat Bhandari (rakeshb@Stanford.EDU)
Date: Fri Mar 09 2001 - 12:25:04 EST

If the end of debt financed expenditures only compounds Japanese 
difficulties which then leads to dollars coming back home to keep 
banks and firms solvent and in business, the US may well suffer a 
very hard landing as well. The catastrophe would hardly be 

NY Times, March 9, 2001

Japan Finances Nearly `Catastrophic,' Official Says


TOKYO, March 8 - Japan's finance minister, Kiichi Miyazawa, stunned his
political colleagues and the financial markets alike today by testifying
before Parliament that the government's finances were close to a
"catastrophic situation."

The yen weakened sharply, falling in value to 120.43 to the dollar, and
then rebounded after the markets had more time to digest Mr. Miyazawa's
comments. Initially, foreign currency traders bet that his remarks had been
deliberately aimed at weakening the yen, a tactic often recommended
recently as a way of halting the deflation that has gained momentum over
the last several months.

But when Mr. Miyazawa was told that his testimony had led some news
agencies to report that he was trying to weaken the yen, he had a tart
response. "Then the wire services are very stupid," he said.

His comments came amid a mounting sense of crisis. The economy seems to be
weakening day by day. Machine orders fell a startling 11.8 percent in
January from the month before, a much sharper decline than economists had
predicted. Concerns about the swift erosion of prices have reached a fever
pitch, and companies are steadily cutting their earnings projections.

There is an increasing sense that Japan must find new ways to address its
many economic problems. "We should look squarely at the reasons why we
could not make the economic recovery a certainty, despite the full measure
of financial and fiscal measures we took in the last 10 years," Masaru
Hayami, the governor of the Bank of Japan, told Parliament on Wednesday.

A spokesman for the Ministry of Finance said that Mr. Miyazawa's remarks to
Parliament merely repeated what the ministry has been saying for some time
about the need to curb government spending. He did, however, use far more
direct and arresting language than in the past, the spokesman said,
answering a question by saying, "As you said, the current fiscal condition
is very extraordinary and close to a catastrophic situation."

Ministry officials were somewhat surprised by Mr. Miyazawa's choice of
words. "It was unusually strong language to describe the current
situation," said Masaaki Omura, a ministry spokesman. "But while his
description was unusual, his message is exactly what we have been saying
all along, which is that the fiscal situation is serious and therefore we
need to think about restoring fiscal balance."

The Japanese government's debts have continued to swell and are expected to
amount to 130 percent of the country's total economic output by the end of
this month. This prompted a lowering of its sovereign-debt credit rating by
Standard & Poor's last week. Moody's Investors Service, which cut its
rating of Japanese sovereign debt in November, has warned that it may do so
again, and the third major rating agency, Fitch IBCA, Duff & Phelps, has
hinted that it, too, may cut its ratings.

The upper house of Japan's Parliament, the Diet, is debating the 82.65
trillion yen ($689 billion) budget proposal for the coming fiscal year,
which must be passed by March 31, when the current fiscal year ends. Some
members of the ruling Liberal Democratic Party have said the deteriorating
economy needs more stimulus from the government. But either tax cuts or
increased spending would increase the debt, and the Finance Ministry
opposes that.

"It's not so clear what he was trying to say, but because the Diet is
currently in the middle of discussing the budget, it was probably aimed
more at his L.D.P. colleagues than at anyone else," said Robert Alan
Feldman, chief economist at Morgan Stanley Dean Witter in Tokyo. "His view
is that the deficit is too large and has been for some time, and perhaps he
wants to restrain some elements in the L.D.P. that want to spend more."

Senior officials at the Finance Ministry strongly denied that Mr. 
Miyazawa was trying to put pressure on the yen. "He was trying to 
raise consciousness about our perilous fiscal condition," one 
official said.

  A comment on Wednesday by Mr. Hayami, which some analysts 
interpreted as a demand for a weaker yen, spurred speculation today 
that the Finance Ministry would order the bank to intervene to drive 
the currency lower. Mr. Hayami said today that his comment had been 
misconstrued, and Mr. Miyazawa denied that the ministry     had any 
plans to intervene.

             There is another potential explanation for Mr. Miyazawa's 
forceful speech. It may be part of an elaborate
                    fence-mending that seems to be going on among the 
Bank of Japan, the Finance Ministry and the Financial
                    Services Agency, Japan's financial regulator.

        For more than a year, the bank and the ministry have been 
lobbing criticism at each other; the ministry said
                    the bank was mismanaging monetary policy, while 
the bank found fault with the ministry's handling of
                    fiscal policy. The war of words peaked in August, 
when the Bank of Japan ended the zero-interest policy it
                    adopted at the height of the 1997-98 fiscal crisis 
and raised its benchmark short-term lending rate to 0.25

                    Last week, in what appeared to be a conciliatory 
gesture, the bank reduced the rate to 0.15 percent. It
                    included an unusual phrase in its announcement, 
saying it "strongly hoped" for speedier structural reform.
                    Apparently in response, Hakuo Yanagisawa, the head 
of the Financial Services Agency, announced a
                    stringent plan to clean up Japan's debt-laden 
banks and corporations.

                    The bank has also gone on a charm offensive, 
permitting its officials to speak more freely to reporters. And
                    many analysts think the nine-member policy board 
will restore the zero-interest rate at its March 19
                    meeting. One official said today that four of the 
members were prepared to vote for a further rate reduction.

                    Mr. Miyazawa may be chiming in as well. "Perhaps 
he has decided to take part in this cooperative game that
                    seems to be developing among financial regulators 
and monetary policy makers by expressing an intent to
                    get the budget under control and institute 
spending cuts," Mr. Feldman said. "If what he said today was in
                    fact a signal to officials in his ministry and to 
his colleagues in the Diet that he intends to work together
                    with the bank and Yanagisawa, then that is an 
extremely good sign."

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