David D. Hale is the global chief economist for the Zurich Group and its investment affiliates. He joined the group following its acquisition of Kemper Corporation, where he had served as chief economist for many years. Mr. Hale writes regularly on a broad range of economic subjects and has testified frequently before Congressional committees. He serves on the advisory committees of several private and public organizations, including the Federal Reserve Bank of Chicago.
In this interview, conducted July 11 in Washington, D.C., by Arthur J. Alexander, president of JEI, Mr. Hale emphasizes the importance of restoring profitability and increasing the rate of return on capital to competitive global levels as crucial elements for putting the Japanese economy on a self-sustaining growth track. An important part of this process is the liquidation of bad loans, the revaluation of assets and the recapitalization of the financial system. In fact, there already has been substantial change in the Japanese financial system, but additional changes are still required. The concern is that the process is proceeding too slowly and the scale of the problems continues to grow.
The immediate cause of Asia's crises was massive amounts of short-term dollar debt and fixed exchange rates. Any question about the safety of these loans led to hesitation to make new loans, which was followed by devaluation and collapse. However, behind the immediate cause was a long history of unprofitable investment that would have produced a slower growth rate eventually.
The impact of Asian financial problems on the U.S. economy will be to shift the structure of demand, with export markets losing out to those benefiting from low prices in international markets and stronger domestic-based demand. A longer-term effect could come from possible political repercussions in Asia that could produce nationalism and a turning against the United States and open markets.
DOMESTIC POLITICS SET THE STARGE FOR CLINTON, OBUCHI DRAMA by Eric Altbach
President Bill Clinton and Prime Minister Keizo Obuchi, who met at a bilateral summit September 22 in New York, are two leaders struggling for political survival. The meeting, closely watched by nervous global financial markets, came at a time when many observers were calling on the United States and Japan to do more to help avert the spread of international economic instability. Furthermore, the U.S.-Japan relationship itself, according to some insiders, may be troubled.
NORTH KOREAN MISSILE LAUNCH TOPS TWO-PLUS-TWO MEETING AGENDA by Barbara Wanner
North Korea's August 31 launch of a multistage, Taepodong-1 rocket "presents a serious threat to the security interests of [the United States and Japan] and to the [Asian] region," according to a statement issued September 20 by Secretary of State Madeleine K. Albright, Secretary of Defense William Cohen and their Japanese counterparts, Foreign Minister Masahiko Komura and Japan Defense Agency Director General Fukushiro Nukaga. The four ministers, who gathered in New York for the second, biannual U.S.-Japan Security Consultative Committee, or "two-plus-two" meeting, issued a clear warning to Pyongyang that further tests would not be tolerated. They warned the closed, Stalinist state not to "develop, test, launch or deploy missiles, or export missiles and related material and technology."
MONETARY GROWTH LIKELY TO ACCELERATE IF BANK OF JAPAN IMPLEMENTS ITS POLICY by Arthur J. Alexander
The Bank of Japan announced September 9 that it would reduce the interest rate it controls directly. It sought to move the overnight call rate the amount that one bank charges another to borrow funds overnight from the already historically low rate of 0.50 percent to a new record low of 0.25 percent. To accomplish this, BOJ must increase the money supply by purchasing publicly held Japanese government debt. Since this policy was announced, the interest rates on the benchmark government 10-year bond have sunk to historically low levels, at one point falling below 0.65 percent.
LDP, OPPOSITION STRUGGLE FOR UNDERSTANDING ON BANK REFORM by Douglas Ostrom
Japan's two top party chiefs, each facing a political imperative to reach an agreement with the other, announced September 18 an accord to address Japan's banking mess. Some analysts wondered, however, whether Naoto Kan, president of the Democratic Party of Japan, and Prime Minister Keizo Obuchi actually did more to unravel existing policy than to put in place a new one. Those concerns were reflected in the September 21 close of the Nikkei average of 225 shares traded on the first section of the Tokyo Stock Exchange. On that day the first full day of trading following the agreement the Nikkei 225 hit 13,597, the lowest level since early 1986.