O'Neill renews call for Japan reform action


U.S. Treasury Secretary Paul O'Neill says a cheaper yen won't produce sustained growth in Japan

TOKYO, Japan -- U.S. Treasury Secretary Paul O'Neill has stepped up U.S. calls for Japan to take decisive action to deal with its severe economic woes.

With the yen hovering around three-year lows at 134 to the U.S. dollar, O'Neill said a cheaper Japanese currency was no way to produce sustained growth.

"The straight fact is this: exchange rates cannot improve productivity or fix non-performing loans," O'Neill said in an address to the National Press Center in Tokyo Wednesday.

The yen has fallen about 15 percent against the dollar from its September high, prompting complaints from Japan's Asian neighbors that Tokyo seemed to be engaged in a deliberate devaluation to make its goods cheaper in other's markets.

In his address Wednesday, O'Neill repeated U.S. support for efforts by Japanese Prime Minister Junichiro Koizumi to pursue structural reform.

Cheaper currency 'not the solution'

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O'Neill said he did not believe that deliberately cheapening the yen was part of Japan's reform agenda but added a stiff warning that it would not work in any event.

"The weight of historical evidence shows that those who have tried to fix underlying economic problems with protectionist measures -- and I count artificially depreciating the currency as one of those -- actually weaken their own economy," O'Neill said.

Japan is the world's second-largest economy but has performed poorly in the last decade. It is now in its fourth recession in 10 years, with an expectation of a 1 percent contraction this year and possible growth of just under 1 percent in 2003.

It has shown a seeming inability to tackle fundamental problems such as the raft of bad loans held by its banks.

West LB chief economist in Tokyo Andrew Shipley told CNN television Wednesday morning that Japan's bad debt crisis was much worse than than the problems faced some years ago by U.S. savings and loans institutions.

Shipley said solving Japan's debt problems required a five to 10-year view.

Market looking for 'decisive action'


O'Neill met BOJ governor Masaru Hayami in Tokyo Wednesday

O'Neill, who met various Japanese officials including Finance Minister Masajuro Shiokawa in Tokyo this week, said financial markets were closely watching for signs that Japan will take "decisive actions" to cope with its economic problems and said that it was vital that it do so.

"Returning Japan to robust and durable growth is of the utmost importance to Japan, to the United States and to the world," he said.

Comments by Japanese officials after O'Neill's Shiokawa meeting initially led to a market perception that Japan was deliberately letting the yen slip to boost exports.

O'Neill sought to avoid a debate over the yen's value and chose instead to emphasise the importance of rapid action on structural economic reforms by Japan.

"Let me say that nowhere have I seen any indication from the prime minister's (Koizumi's) remarks that he believes that tampering with foreign exchange rates is a realistic element of a reform agenda," O'Neill said. "I agree with him."

O'Neill also warned that deflation, or falling prices, was at least as serious an economic problem as inflation, but said it would respond to monetary policy.

Japan's core consumer price index has fallen for 26 straight months, effectively increasing the burden of paying back past debt and exacerbating the banking sector's woes.

O'Neill cautioned that "as long as deflation persists, other reforms remain much more difficult to achieve."

The U.S. Treasury Secretary met Bank of Japan Governor Masaru Hayami on Wednesday before his scheduled return to Washington Thursday.

Reuters contributed to this report.