G7 nears a day of reckoning

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THE meeting of the Group of Seven in Tokyo yesterday was to pressure Japan to get in line with the international programme to bring the Asian financial crisis under control. But, while the crisis talks may have calmed jittery financial markets in the short run, they are unlikely to to improve the prospects for the world economy in the long run.

"Are there going to be policy changes as a result of the meeting?" said Andrew Smithers, a Japanese specialist at the City investment advisory firm Smithers & Co. "Yes, I think so. Will the policy changes make much of a difference? No, I don't think so."

Mr Smithers sees Washington-led Western efforts to bludgeon Japan into cutting taxes to stimulate its economy while letting its weak banks go bankrupt to purge its paralysed financial system as a classic case of cultures not communicating. "Americans believe in action for action's sake," he said. "The Japanese take the Buddhist view that all action leads to suffering."

The result is a stalemate that will inexorably spread recession from East to West, say Mr Smithers and the other bears. Gradually, they say, Japan has been sucked into the Asian crisis. Japan's recession has prompted a run on the yen. On Wednesday President Clinton, fearful that China might devalue the yuan to protect itself against the falling yen, ordered the US Federal Reserve Bank to intervene in currency markets to prop up the yen.

This measure calmed increasingly panicky currency and stock markets, and bought world leaders time to consider the situation. If Japan finds a way to bring its recession under control, fears of a worldwide slump will vanish. If, however, Japan's recession worsens, then Western companies' profits will be hit. This will frighten Western investors. This will lead, at some point, to a run on US shares, and a collapse of the US stock market.

To this doomsday scenario, the bulls, led by deputy US treasury secretary Lawrence Summers, say: Nonsense, Japan will emerge from its recession

Who's right? The world economy is in uncharted waters. What's clear, however, is that some sort of reckoning appears to be approaching. The British and American economies are at the peak of their cycles. Economic life will get tougher for the next year or so. How much tougher is the question on which all sorts of fortunes - not least those of the Government - hinge.