In Finance, Japan Sees an Opening - NYTimes.com

In Finance, Japan Sees an Opening - NYTimes.com:

In Finance, Japan Sees an Opening

By MARTIN FACKLER

The New York Times
October 21, 2008

TOKYO — Just six months ago, five or six “bulge bracket” investment banks stood astride the globe virtually dictating the terms of engagement of international finance — managing deals, pronouncing companies (or countries) investment-worthy or not, and dispensing advice that companies (and countries) ignored at their peril.

Now those brash American institutions have been swept away or tamed. And as the global financial order convulses, some Japanese leaders say they believe their country should take a more active role in economic leadership. While many European leaders cast recriminations and “I told you so’s,” Japan and much of Asia are considering how to fill some of the voids left behind.

The United States will commit as much as a trillion dollars to bailing out its banks, but the Asians are flush with cash, even as countries like Japan — the world’s second-largest economy — face recessions of their own.

Japan could use some of its formidable $1 trillion in reserves to help troubled nations, including South Korea, should that country’s own recent bailout of its banks prove inadequate.

“The dominance of American financial giants has been shaken,” said Takatoshi Ito, a professor of economic policy at the University of Tokyo. “Now the tables have turned, and an Asian country like Japan can have the role of white knight and capital provider.”

Some may wonder how Japan, which suffered its own severe downturn in the 1990s and has a stalling economy now, has the right to tell others what to do. But in recent days, lawmakers have begun floating proposals about how Japan, traditionally passive, might use its deep pockets and bitter experience from the 1990s to help global growth and, along the way, Japan’s own export-driven economy.

Recently, Shoichi Nakagawa, Japan’s finance minister, offered some of Japan’s $996 billion in foreign currency reserves to rescue smaller nations threatened with bankruptcy by the global credit crisis. Other lawmakers have suggested using yen loans to help developing countries build roads and power plants, to revive global growth and rekindle demand for Japanese bulldozers and other goods.

Another idea taking shape here calls for sending accountants and lawyers experienced from Japan’s 1990s financial cleanup to help American banks and regulators sift through mountains of toxic American mortgage debt.

While it is unlikely that the nascent proposals would stem what many call the biggest financial crisis since the Depression, the fact they are being discussed at all underscores the vacuum in leadership felt across the world in the wake of an American-led economic debacle. The fact they are appearing in Japan, a nation long content to follow Washington’s lead, reflects what many here call a movement toward a new economic order in which no single country dominates.

“With the relative decline in U.S. economic and financial power, it is inevitable that U.S. leadership will also decline,” said Yasuhisa Shiozaki, a former chief cabinet secretary. “We are seeing a new, multipolar economic regime starting to emerge.”

Mr. Shiozaki and others are careful to point out that no one is talking about replacing Washington as guardian of the global economy. Rather, what they envision is a world where America shares oversight of the global economy with emerging powers like China and India, as well as Europe and Japan.

They are also talking about each country bringing its various strengths to the table as a new, post-subprime world economic order takes shape.

Many political leaders favor using Japan’s foreign reserves as a sort of war chest for combating the economic malaise. The finance minister’s offer, made at a meeting in Washington of the International Monetary Fund earlier this month, would keep Japanese money ready as a lifeline to strapped countries.

While lawmakers here refuse to say so in public, their biggest source of concern appears to be neighboring South Korea, whose currency and stock markets have both been hard hit by flight of foreign capital.

The finance minister’s plan calls for financing bailouts that will be administered by the International Monetary Fund.

Japanese finance officials, however, have also been talking with the fund about easing the terms of its bailouts, said Naoyuki Shinohara, the vice minister for international affairs. Asia still has bitter memories of the harsh terms the fund imposed after the region’s 1997 financial crisis.

Other proposals call for Japan to spur the global economy through increasing the billions in overseas development loans and other aid it spends building new infrastructure in developing countries in Asia and Africa, for example, as China has also done. A column in Asahi Shimbun, a leading daily, likened the idea to the Depression-era New Deal.

“We need to create new sources of demand, or the global economy is in trouble,” said Hakuo Yanagisawa, a former financial services minister who now heads the Liberal Democratic Party’s project team on responding to the current financial crisis. “A purely financial response to the crisis is not enough.”

Plans are also afoot to assemble teams of financial experts from Japan’s private sector and 1990s-era government bodies like the Resolution and Collection Corporation, which led Japan’s cleanup of its nonperforming real estate loans a decade ago, according to Mr. Yanagisawa.

He said the Japanese government would soon put out feelers through its embassy in Washington about whether such help would be welcomed by American regulators, who face a similarly formidable task of calculating the worth of mountains of mortgage-backed securities polluting the American financial system.

But many Japanese say Japan’s biggest contribution would be simply keeping its own economic house in order. They say it should bolster government spending to offset declines in exports to the United States, which appear to be pushing Japan’s $5 trillion economy into recession. A strong economy, and Japan’s relatively healthy banks, which largely avoided the subprime mess, would give the nation a new authority in global economic affairs.

Copyright 2008 The New York Times Company