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Tuesday, October 29, 2002


Having come out two weeks ago dramatising the possible consequences of a 'hard landing' in Japan in a way which may have been a little OTT for the taste of some people, it is heartening to see that one of the leading Japan 'experts' comes to similar conclusions, in a much more reserved way, of course.

By Akio Mikuni and R. Taggart Murphy
An upheaval in Japanese finance, bringing with it a complete restructuring, is not impossible. But such a restructuring would produce shocks that would reverberate around the world. Japan as a nation holds nearly $3 trillion in dollar-denominated assets, many of them ultimately supported by the very deposits that would be withdrawn in a wholesale reorganization of Japanese banking. Those dollars have played an indispensable role in permitting the United States to swell its trade deficits far beyond the levels of most nations.

That so many foreigners are willing to keep their earnings from trade inside the United States banking system — what "holding dollars" literally means — helps the United States tolerate its deficits. But this situation is precisely what restructuring in Japan threatens. If banks were forced to call in loans to pay off depositors, and if those loans financed their customers' dollar holdings, Japanese companies would be forced to sell their dollars for yen. Real money and purchasing power would then leave the United States as the conversion weakened the dollar, forcing a rise in interest rates and import prices and further raising the risk of recession. That is what usually happens to countries that run excessive trade deficits — foreigners lose confidence in these countries' currencies, interest rates rise, the economy goes into recession and, as people can't afford to buy so many imports, the trade deficit begins to close. The United States has escaped this fate largely because of the very problems with Japanese finance that Mr. Takenaka promises to attack. Washington ought to be careful what it wishes for.
Source: New York Times

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