White House urges Japan to fight deflation

WASHINGTON, Feb. 27 (UPI) -- Japan must tackle deflation in order to jump-start its ailing economy once and for all, the White House's chief economist said Thursday.

The White House's Chairman of the Council of Economic Advisers Glenn Hubbard pointed out that while Japan has seen little or no growth for the past 12 years, the primary hurdle for growth in the world's second-largest economy was deflationary pressure plaguing the country for the past three years.

And controlling prices, both inflationary and deflationary, came under the auspices of the central bank, giving the Bank of Japan, Hubbard said.

"Monetary policy is not blameless" for Japan's continued woes, the White House economist said, even though he did acknowledge that the deflationary spiral was only one cause for the country's economic doldrums. The comment comes only days after the new head of the Bank of Japan was tapped by Prime Minister Junichiro Koizumi.

Toshihiko Fukui is expected to succeed Masaru Hayami as the BOJ head when his five-year term ends mid-March. But critics have already been concerned that Fukui, like Hayami, has opposed taking drastic steps such as inflation targeting to ensure that prices actually start to inflate. The continued deflationary pressure has kept Japanese consumers and businesses alike from spending, as they anticipate prices to fall still further in the future.

Hubbard did, however, also point out that non-performing loans continued hurt growth prospects, by bogging down the financial system.

"You can't fix one without looking at the other," the White House economist said.

Nevertheless, Hubbard said that the Japanese central bank had a key role to play in getting the country's economy back on track once and for all. He also said that Koizumi should consider cutting taxes as a key means to jump-start the economic engine.

"It's in the interest of the president ... to see the second largest economy in the world strong," Hubbard added.

Hubbard's last day as the head of the CEA is Friday. The administration has already tapped Gregory Mankiw, an economics professor at Harvard University, who will need to be confirmed by Congress, a process that could take several weeks.

In December, Bush fired Larry Lindsey, who headed the National Economic Council as well as Treasury Secretary Paul O'Neill due to the two men's differences from the White House's economic perspective. Since then, Hubbard has been the administration's most visible spokesperson on economic policy.

But with the appointment of John Snow as O'Neill's successor and Stephen Friedman at the held of the NEC a fortnight ago, Hubbard said it was easier to leave the White House. The economist gave no reason for his departure, except to state he wanted to spend more time with his wife and two children, who have been living in New York since he took office in Washington two years ago.