WASHINGTON, Jan. 8 (UPI) -- Japanese economic minister Heizo Takenaka has been a busy man lately.
Arriving in Washington late Sunday, Takenaka spent the greater part of the following day meeting with senior government officials, including U.S. Treasury Secretary Paul O'Neill, to discuss Japan's economic outlook and hear what they had to say about U.S. growth prospects since the terrorist attacks.
Takenaka's mission was to paint a glowing picture of Japan's prospects in the longer term, while acknowledging that prospects in the nearer-term remained bleak. And while the world's second-largest economy continues to be mired in a slump, Takenaka pulled in crowds of reporters, academics, and policy-makers both Monday and Tuesday.
U.S. officials "have high hopes for the Japanese economy -- reassuringly so," Takenaka told a handful of Japanese reporters late Monday following his meetings with O'Neill, White House chief economic adviser Lawrence Lindsey and Glenn Hubbard, head of the U.S. Council of Economic Advisers.
But he added that not one made any particular suggestion or request on what Japan should do to revamp its ailing economy, which is in its fourth recession in a decade.
"O'Neill emphasized Japan's underlying growth potential that could be unleashed through reform ... Hubbard and Lindsey said that they were particularly looking forward to Japan resolving its bad loans," Takenaka said. He added that all three were extremely supportive of the country's efforts to undergo sweeping structural reform.
The first professional economist to take on the post under Junichiro Koizumi, prime minister, Takenaka was also seen as an academic who could analyze the country's shaky economy objectively and offer prescriptions that went beyond party politics. But as a cabinet member, Takenaka is in a tight spot, as he is expected to boost economic morale and effectively be its biggest cheerleader.
Takenaka now pegs Japan's gross domestic product growth rate to come in at minus 1 percent in the current fiscal year, and be flat in the next.
It's hardly a heartening picture, but Takenaka also repeatedly states that he anticipates Japan to recover to its full growth potential of around 2 percent within the next five years.
That projection is a far cry from what most economists outside Japan, and outside the Japanese government, anticipate. Indeed, in its latest report on global economic outlook released in December, the International Monetary Fund pegs Japan's GDP to fall to minus 1 percent in 2002.
The IMF projects U.S. GDP growing 0.6 percent, and the European Union expanding by 1.3 percent during the same time.
The question then becomes why the Japanese government is so optimistic about its future prospects. Takenaka pointed out that there was headway in getting rid of the bad loans plaguing the country since the burst of the bubble economy in the early 1990s.
At that time, Japanese banks provided loans aggressively to businesses with real estate as collateral. When land prices collapsed, the banks were left with loans which have gone from bad to worse, leaving financial institutions less than willing to lend to new investors, resulting in a credit crunch.
What's worse is, bad loans are rising as deflation hits the nation, reducing the price of assets still further. The financial system is crippled by the sheer size of the non-performing loans.
Takenaka told an audience of academics and policy-makers that the Resolution and Collection Corp., a government-sponsored organization specializing in bad loans, will gradually reduce the mountain of debt.
Takenaka also said Japan has pushed forward with structural reform to encourage expansion in growing industries, and to put an end to the deflationary spiral.
"These problems will be resolved," Takenaka said.
But others are far more wary of such a steady rebound.
"With all due respect, I must say I cannot share the minister's optimism," said Adam Posen, an Institute of International Economics economist specializing in Japan, who spoke after Takenaka.
Posen said his own GDP projection for Japan was between minus 1.5 and 2 percent next fiscal year, adding that a political upheaval could reduce that by yet another percentage point.
Meanwhile, the Japanese government remains too dependent on public spending as a means to rev up the economy, Posen said.
Indeed, Takenaka made clear that taxpayers' money could be spent on keeping some select banks afloat, instead of allowing all financial institutions to file for bankruptcy. Such use of public funds would ultimately throttle the country's financial system, according to most economists.
One clear edge Japan currently has, however, is the yen's weakness against the U.S. dollar. The currency's decline in recent weeks has made Japanese exports less expensive and thus more competitive overseas, which has been a blessing for the country's exporters. But the favorable exchange rate has upset many neighboring Asian nations, particularly South Korea and China, which compete directly with Japanese products on the overseas markets.
Takenaka said that the issue of foreign exchange was not raised by any of the three top economic officials he met, but should the yen continue to weaken against the greenback, the United States as well as Europe could join the Asian nations' call to reverse the trend.
While interest in Japan's economy remains high, it appears increasingly that it is fear, rather than hope for the future that continues to draw Washington's movers and shakers to listen to what the economy minister has to say. And unfortunately, it seems that while people are more than willing to listen, they are less willing to swallow what he anticipates.
(With reporting by Zachary Wales)
