Magazine article Global Finance

Clueless in Tokyo

Magazine article Global Finance

Clueless in Tokyo

Article excerpt

ASIA FOCUS

JAPAN

Japan's government has little leeway for action as the gloom thickens. e By Gordon Platt

As Japan slogs through its third recession in a decade, its policymakers are running out of ideas on how to reflate at a time when the national debt is piling sky-high and interest rates are practically zero.

What's left after fiscal and monetary policies fail, apart from the weak-yen option, which carries its own risks?

"The Bank of Japan has, in effect, opened the doors on a helicopter and poured money onto the banks," says Lara Rhame, economist at Brown Brothers Harriman in New York. "Maybe it will have to bypass the financial system altogether and drop the money directly to consumers."

Everybody is looking to the central bank for a quick fix, Rhame says, but the reality is that the brilliant ideas are all for the long term and involve corporate restructuring.There is no easy solution.

Carl Weinberg, chief economist at High Frequency Economics, says Japan, the world's second-largest economy, is in a depression, not a recession. "The cause of this depression is monetary, triggered by catastrophic destruction of wealth that began in 1990 and has left the nation functionally bankrupt," he says.

"The economy cannot grow again until the monetary corset that binds the nation's capacity to create credit is broken," Weinberg says. This will require radical monetary policies-a course of action the BOJ has not yet chosen to pursue, he says. "We expect that Japan will languish in this state of depression, possibly for decades, unless the BOJ acts to catalyze the recovery process,"Weinberg says.

During this period, the financial system will remain vulnerable to shocks and teeter on the brink of collapse."This is the warning all the credit agencies are sending their customers, as are we," Weinberg says.

John Chambers, managing director of sovereign ratings at Standard & Poor's, says Japan's policymakers have not run out of ideas of how to reflate the economy, but they lack the political will to act. …

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