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 nation-specific. rb NY Times, March 9, 2001 Japan Finances Nearly `Catastrophic,' Official Says By STEPHANIE STROM 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 percent. 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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