The global economy is now facing a "pivotal" moment, with the world waiting for Japan to act decisively to galvanise and reform its economy, Deputy US Treasury Secretary, Mr Lawrence Summers told Congress yesterday. He was addressing the Senate Foreign Relations Committee following weekend meetings in Tokyo with finance officials from Japan, Asia and leading western nations on steps to salvage near moribund Japanese growth.
Fear that not enough is being done to clean up Japan's banking sector sent the yen tumbling through the 141-yen level against the dollar.
The slide in the yen, which has piled pressure on Beijing to devalue the yuan and threatens a new Asian economic crisis, came on the eve of US President Bill Clinton's landmark visit to China.
Japanese politicians have now vowed to clean up the nation's banking mess, calling for a cut in the number of banks.
Senior members of the ruling Liberal Democratic Party (LDP) called for wholesale changes in the banking sector, which is burdened by over-capacity and excessive competition, with one member urging that the number of Japanese banks be halved.
At the same time, a senior Japanese government official said Japan had only just realised that action to deal with colossal bad bank loans was the key to solution of the economic crisis.
The idea of creating a bridge bank, to take over insolvent banks, had arisen only in the past few weeks, the official said, even though Tokyo had been trying to fix its recession-struck economy in earnest since mid April.
On Tuesday, the government and the governing Liberal Democratic Party began discussing how such a bridge bank might be formed. A final decision on the framework of the bank is expected at the beginning of July.
But it is too late for Sanyo Securities, one of Japan's top 10 brokers, which has decided to liquidate itself after failing to recover since filing for bankruptcy last year.
And other sectors are not immune. Japan's output of cars, trucks and buses in May dropped a record 19.7 per cent from a year earlier, the eighth straight year-on-year fall, an industry group said Wednesday.
The ongoing crisis means action by the Japanese authorities is now crucial, according to Mr Summers. "Weakness in Japan is now having a clear impact on the other troubled economies of Asia."
Indeed, China's economic growth for the first half of 1998 was under 7.5 per cent, falling short of the 8 per cent target for the year, according to the official Xinhua news agency.
Economists said the figure matched widespread expectations that Gross Domestic Product growth rate this year would not meet the official target.
According to Mr Summers, the concerted US-Japanese central bank intervention last week to shore up the yen provided "a window of opportunity for action".
US and western officials have long been pressing Japan to cut taxes, implement deregulation and open its markets in order to act as a growth engine for sluggish economies elsewhere in Asia.
