Japan warned on `precarious' economy

Japan was put on the defensive at Saturday's summit after the United States issued an unusually hard-hitting warning about the precarious state of the country's economy, writes Magnus Grimond.

In a blunt statement after the conference, Robert Rubin, US Treasury Secretary, said the Japanese "clearly have difficult issues to deal with ... these concerns merit a fair bit of attention going forward."

The remarks revive memories of the 1980s, which were marked by a series of trade and other economic disputes between the US and Japan. This time, however, the continuing weakness of the Japanese stock market has mirrored an economy that appears to have stalled.

After booming at the start of 1996, growth has slowed, with worries resurfacing that Japan could slide into recession. It is feared that a weaker yen, while boosting exports, could prompt a stock market sell-off, potentially tipping more of the country's banks over the edge and hitting the world economy.

The US is particularly touchy on this issue as it runs a large trade deficit with Japan and benefits from substantial investment from the Japanese, who are the largest foreign holders of US government bonds.

On Saturday, Japanese Finance Minister Hiroshi Mitsuzuka reassured Mr Rubin that Japan would continue to pursue economic policies to promote strong domestic demand.