Japan's $1 trillion to the rescue?
Ahead of the G-20 summit on the financial crisis, many are eyeing Japan's huge foreign reserves. But Tokyo is reluctant to use them on struggling nations.
By Peter Ford | Staff writer of The Christian Science Monitor
from the November 14, 2008 edition
Tokyo - Can Japan, the world's second largest economy, save the global financial system?
Don't count on it.
As world leaders prepare to meet in Washington Saturday to seek a way out of the financial crisis, some are casting covetous eyes in the direction of Japan's $1 trillion worth of foreign reserves as a source of salvation for troubled nations and banks.
In Tokyo, too, a group of parliamentarians from the ruling Liberal Democratic Party (LDP) are pressing the government to spend some of its reserves – the second largest in the world – to win international prestige and diplomatic influence.
They are likely to be disappointed. The Japanese authorities say that while they are willing to lend some money to the International Monetary Fund (IMF), they would be happier offering advice born of their own financial crisis a decade ago than a lot of cold cash to today's victims.
And though Japan's financial system is weathering the crisis better than many other rich countries, a property slump and falling exports are likely to throw the economy – already heavily burdened by debt – into a recession, denting Tokyo's ability to lead the world out of the current turmoil.
The Organization for Economic Cooperation and Development (OECD) predicted Thursday that Japan's economy would shrink 0.1 percent next year, not much better than the average for its members – a 0.3 percent contraction. The US economy is expected to shrink by as much as 0.9 percent.
"We can use our reserves only to buy and sell foreign exchange to stabilize the yen," explains a senior Finance Ministry official who asked to remain anonymous. "We can't use them for anything else."
That caution frustrates Kotaro Tamura, a young Turk in the LDP and former investment banker, who sees the financial crisis as "a huge opportunity for Japan."
"Cash is king right now, and we have a huge cash pile" he points out. "We should invest in Korea and the US, help rescue them, and we would get economic and diplomatic returns."
His enthusiasm for more creative ways of using the reserves has won a certain amount of support in financial circles. "Japan has big foreign reserves and it is worth considering how to spend them," says Hiromichi Shirakawa, Credit Suisse chief economist for Japan. "The money could finance more effective measures to underpin the international financial system."
Government officials, however, insist that Japan's reserves, 85 percent of which are invested in US Treasury bills, are not just sitting ready to be spent.
The dollars were amassed, they point out, when the Bank of Japan was intervening heavily in the foreign exchange market a few years ago to stop the yen from rising in value, which would have hurt exports.
The government raised the money to buy those dollars by issuing yen-denominated bonds, so the foreign reserves in dollars – an asset – are balanced by an equivalent yen debt – a liability.
This makes the Finance Ministry reluctant to use the reserves in potentially risky investments, such as saving Iceland or propping up troubled US banks in return for equity.
"There is no imagination" for such a venture, says Teizo Taya, a former senior Bank of Japan official who now teaches at Rijko University in Tokyo. "This government does not think of itself as a hedge fund."
Lending to the IMF, however, as it seeks more funds with which to bail out struggling economies, fits Japan's ambitions better: Japan is set to offer the IMF as much as $100 billion in foreign reserves, Reuters cited a government source as saying.
"We see lending to the IMF as basically risk-free," Finance Minister Shoichi Nakagawa said recently.
Another benefit of such loans is that Japan's money would remain in US dollars, so there would be no need to sell US treasury bills; large sales of those bonds would have a negative effect on the value of the US dollar.
"The Japanese government is still very sensitive to this," says Mr. Shirakawa. "They think they need to support the US and the dollar for national security reasons" in order not to endanger the US security umbrella in the Pacific under which Japan has sheltered for the past half century.
That line of thinking also means that in the coming debate over the need for reforms in the international financial system, Tokyo will resist proposals that cast doubt on the centrality of the US dollar, he adds. "Japan would be the last country to drop support for the dollar," Shirakawa says.
"The US dollar is the currency of Asia," adds Martin Schulz, an economist at the Fujitsu Research Institute in Tokyo. "You don't upset your central banker. "It is a no-no in Japanese politics to offend the United States. No one would dare think about it."
Instead, he predicts, the Japanese government will join any international initiative that the Group of 20 might agree on and contribute funds to it, "but they won't be the ones drafting significant plans or putting numbers to them."
Officials here say their greatest contribution to resolving the financial crisis will be to remind other nations of the lessons Japan learned from the Asian financial crisis a decade ago.
They were reflected, the Finance Ministry official says, in the principles espoused last month by the G-7 finance ministers when they agreed to take urgent steps to unfreeze credit markets, ensure banks have ready cash to lend, and reassure private depositors their money is safe.
"We have been insisting on these three points," the official says. "It took us time to implement them" 10 years ago "and we know from the past, the faster the better."
The speed with which the US and European authorities intervened to shore up the financial situation last month, he adds, shows that "in a philosophical sense, Japan took a leadership role."
Mr. Tamura, however, would like a bit more visibility for that role. "It's an emergency now, so it's a favorable situation for Japan to build up some kind of international leadership" while making long-term profit from successful foreign investments, he argues.
"But bureaucrats don't want to risk failure," he laments.
麻生：由日本帶頭建立新全球金融體系
• 2008-11-16
• 中國時報
• 【法新社】
正當日本宣布新措施以因應全球經濟危機之際，首相麻生太郎今天在華盛頓提出一項雄心勃勃的計畫，由日本帶頭創立新的全球金融機制。
麻生出席在華盛頓舉行的二十國集團（G20）世界領袖高峰會後，結束訪美行程。峰會今天結束之前，各國領袖通過一項行動計畫。這項計畫旨在提振全球呈現衰退的經濟，並預防未來金融劇變。
麻生在記者會上說：「整個高峰會期間，我都感受得到各界對日本高度期望。」
他說：「這個世界正邁向新紀元。日本應該採取具體行動。我們期望能持續採取主動，建立一個符合新紀元的新經濟體系。」
日本在G20高峰會上宣布，日本將提供至多一千億美元（新台幣三兆三千一百二十五億元）貸款給國際貨幣基金（IMF），用來作為受創新興國家的金融生命線。
日本另外也同意出資二十億美元（新台幣六百六十二億元）投資世界銀行的新基金，以幫助較小新興市場的銀行進行內部重組。
Japan to seek to take lead in creating new financial order: Aso
by Shingo Ito Shingo Ito Sun Nov 16, 12:47 am ET
WASHINGTON (AFP) – Prime Minister Taro Aso has made an ambitious bid to take the lead in creating a new global financial mechanism, as Japan announced its fresh commitment to tackling the global economic crisis.
Aso wound up his visit here to attend a summit of the world's top leaders, which ended on Saturday by adopting an action plan to boost flagging global growth and prevent future financial upheaval.
"Throughout this summit, I felt high expectations to Japan," Aso told a news conference.
"The world is now entering a new era," Aso said. "I think Japan should take concrete action. We would like to continue taking the initiative in establishing an economic system that can correspond to the new era."
During the summit, Japan announced a plan to lend up to 100 billion dollars to the International Monetary Fund to help provide financial lifelines to crisis-hit emerging countries.
Japan separately agreed to invest two billion dollars in a new World Bank fund to help recapitalize banks in smaller emerging markets.
Aso also stressed that Tokyo has an "outstanding experience" of overcoming its own financial crisis triggered by massive bad debts in the late 1990s, like the current turmoil which began in the United States.
Analysts say Aso has a window of opportunity to boost Japan's presence on the world stage and match its clout as an economic power during a series of upcoming talks with political leaders.
Tokyo is the second-largest donor after Washington to many global institutions, including the International Monetary Fund, but its attempts to raise its voice in the geopolitical arena have often ended in failure.
Shortly after the Washington meeting, Aso will head to a summit with other Asia-Pacific leaders in Peru, where he is expected to hold talks with US President George W. Bush and Russian President Dmitry Medvedev.
"I would like to proceed with our action to help strengthen financial cooperation in Asia and support self-reliant development of the region," Aso said.
On the sidelines of the Washington summit, the finance ministers of Japan, China and South Korea agreed to consider increasing the size of bilateral currency swap arrangements among the three countries.
Aso may also meet US president-elect Barack Obama on his way back from Lima.
"I had an impression that he is interested in Asia," Aso said, referring to his telephone talks with the incoming president following his election. "It is important for us to have a person with interest in Asia."
Aso's close aides held talks here with former secretary of state Madeleine Albright and a former Republican lawmaker who visited the US capital to pursue contacts with top G20 players on Obama's behalf.
For Aso, the flurry of diplomatic events will be a key test of whether he can boost his support at home as the nation prepares for general elections due by September next year at the latest.
Public support for Aso's cabinet was above 50 percent in opinion polls after he took power from his troubled predecessor Yasuo Fukuda two months ago, but has since declined and is now nearing 40 percent.
