Japan: 2 deficits threaten intl financial order

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2 deficits threaten intl financial order

Yasuhiko Shibata

On Wednesday, we usher in the month of November. There was no "October crisis"--no U.S. stock market crash to send financial markets worldwide into a tailspin. But it is too soon to relax, because the buds of a crisis can be seen everywhere.

Many people will recall that it was in the month of October in previous years that major turmoil, originating in the U.S. markets, occurred in the global economy, including the Great Depression, triggered by the major crash on Wall Street in 1929, and Black Monday as recently as 1987.

A number of analysts made ominous predictions that this year, the final year of the 20th century, something would happen in New York in October.

The reason they did so is that there have been signs of decline in the U.S. economy, which has been enjoying a record period of growth and rising stock prices driven by the information technology revolution.

One such sign is that personal consumption, which grew considerably thanks to a rise in the value of consumers' assets due to rising stock prices, has been declining since September, largely because of the failure of stock prices to pick up or the decline in certain stocks.

An increasing number of economists in the United States believe the U.S. economy has peaked, a view supported by the sharp rise in corporate inventories.

In addition, there is uncertainty over the price of crude oil. The price of crude oil, which is high during periods of high demand, may, together with a sharp rise in the price of natural gas, further dampen personal consumption.

Apparently because of such concerns, stocks on the New York Stock Exchange plummeted on two occasions in October. As a result, the Dow Jones industrial average briefly fell to near the 10,000 mark, sending prices tumbling on stock markets around Asia, including in Japan.

Fortunately, the nosedives in U.S. stocks did not lead to a chain reaction of stock market crashes around the world, chiefly because a sizable flow of funds from Europe into the United States is underpinning the prices of U.S. stocks.

As long as there continue to be two large deficits that may lead to the collapse of the current international financial order, fears of a global financial panic will not go away.

One of the two deficits is the U.S. current account deficit, which is approaching 5 percent of the United States' gross domestic product.

The other is Japan's public debt, which is equivalent to 130 percent of the nation's GDP.

The U.S. economy has been pulling the global economy, which has been suffering from deflation. The U.S. current account deficit has swollen as the United States has increased its imports and fervently consumed them. If the situation remains unchanged, the value of the U.S. dollar, which is essentially the international currency, will inevitably plummet.

Such a plunge would instantly mean the collapse of the global currency and financial order. Yet, so far, the huge flow of capital into the United States from Asia and, particularly, Europe has financed the U.S. deficit.

The capital has come in the form of purchases of U.S. firms and investment in U.S. stocks and bonds by European businesses.

As a consequence, there has been an unstoppable decline in the value of the euro on the currency markets. However, this "Buy American" trend will not last forever.

In European Union member countries, which have been directly hit by declines in the euro and rising crude oil prices, inflationary pressures have resurfaced, prompting growing calls for supporting the euro and holding inflation in check through interest rate hikes.

For this reason, the European Central Bank, taking concerted action with other central banks, recently intervened in the currency markets and raised rates further.

As the gap in interest rates between the United States and European countries narrows, there will very likely be a reverse flow of capital, which may force the United States into a vicious circle of rising rates, falling stock prices and a deteriorating economy.

Meanwhile, there is a surprising lack of interest among the Japanese people in the problem of their own fiscal deficit.

The U.S. and European governments, as well as international organizations, have repeatedly warned of the serious implications of Japan's going bankrupt.

The worry is that the excessive issuance of government bonds, totaling as much as 100 trillion yen a year, will lead to a downgrading of the bonds and rises in long-term interest rates through the erosion of international confidence in the Japanese economy. If this happened, Japan would trigger a global recession instead of underpinning the world economy.

Moreover, a rise in Japanese interest rates would thwart the U.S. economy by sending the dollar down, pushing U.S. interest rates higher and U.S. stocks lower.

As economic globalization progresses, the influence of the U.S. economy--the world's largest--on the global economy will only increase.

At the same time, the possible adverse effects of the Japanese economy--the second largest in the world--on the global economy are becoming ever greater.

But many people in Japan seem to be passing through the crisis-beset, closing stages of the century, with a blind eye to the possibility that the nation's fiscal coffers might go bankrupt, like a man who never gets over a hill because he stays in the valley.

(Shibata is a senior fellow at the Yomiuri Research Institute.)

-- (worth@a.read), November 01, 2000


Here's the nub of the issue:

>> ...the United States has increased its imports and fervently consumed them. If the situation remains unchanged, the value of the U.S. dollar, which is essentially the international currency, will inevitably plummet. <<

This is also why so many people will not see the oncoming train. While you are fervently consuming, life looks mighty cushy. Let the good times roll!

-- Brian McLaughlin (brianm@ims.com), November 01, 2000.

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