G7 criticism leaves Japan under pressure to boost economy

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The Independent Online
JAPAN came under stiff criticism from other members of the Group of Seven (G7) leading economies at the weekend for failing to do enough to boost its flagging economy and financial system. The tensions spilled over, unusually, outside the private meeting of finance ministers and central bank governors from the G7.

Analysts expected the forthright attitude of the other delegations to send the Japanese currency and stock market lower this week. The markets were already underwhelmed by the recent Japanese economic package of 2 trillion yen (pounds 9.6bn) in tax cuts and additional support for the banking system.

Jonathan Coughtery, a currency strategist at Standard & Poor's MMS, said yesterday: "The markets were hoping for the G7 to come up with something substantial, and obviously that hasn't happened. I would anticipate a big run up on dollar-yen in the first part of the week."

The dollar went into the G7 meeting at a one-month high of 127.80, climbing more than 1 per cent on Friday after the Japanese government disappointed financial markets by failing to include any tax cuts or new spending plans in its latest economy-boosting package.

Analysts also expect further falls in the stock market. In the past week the benchmark Nikkei 225 index fell 34.77, or 0.21 per cent, to 16,756.24.

The official G7 communique issued late on Saturday said: "In the view of the IMF, there is now a strong case for fiscal stimulus to support activity during 1998." Gordon Brown, the Chancellor of the Exchequer, chairing the G7 meeting in London, said: "There was a good deal of support for that statement."

The Chancellor said the other G7 countries welcomed the measures the Japanese government had announced last Friday, but added: "Recovery will require continued action."

Earlier, Robert Rubin, the US Treasury Secretary, said the need to restore stability in South-east Asia made strong domestic demand growth important in all G7 countries, but especially Japan.

The meeting did agree on the need to avoid an excessive weakening of the yen, which some analysts fear could exacerbate the trade imbalance between Japan and the US. The statement said the G7 had agreed to monitor the currency markets and "co-operate as appropriate", a conventional shot across the bows of the foreign exchange markets.

Eddie George, Governor of the Bank of England, sent the markets a signal that this would be an especial concern in the coming months. He said: "I think the concern was as much about the prospective imbalance in the world economy as a result of Asia looking forward, rather than anything to do with the situation immediately."

On a separate issue it was the Germans who were isolated, as the other six countries agreed to speed up debt relief for the world's poorest countries. The Germans admitted they had been shaken by a postcard campaign by development charities, whose supporters have been writing to Theo Waigel, the Finance Minister, urging the Germans to be less intransigent in their opposition to help for heavily indebted poor countries.

At this weekend's meeting, Italy and Japan, which normally side with the Germans on this issue, went along with the UK's desire to make a fresh commitment to further progress before the year 2000.

Mr Brown announced that the finance ministers, who are holding a series of meetings during the next few months, would report back to the G7 leaders at the full summit in Birmingham in May. As part of this "Birmingham Process", the Chancellor is likely to tour the affected Asian countries this spring.

Despite the concern about the feeble state of the Japanese economy, on which the whole Asian recovery will depend, the ministers stuck to their view that the spillover to their own countries would be "manageable". There was a welcome for the statement by export credit agencies at the weekend that export credit guarantees to the region, worth about $15bn (pounds 9bn) last year, would be sustained in 1998.

The G7 agreed an action plan for preventing future crises. The key points were improved supervision of the international financial markets, an emphasis on better disclosure of economic data, and a strengthening of financial systems.