Greenspan Seeks to Reassure US

Another view sees three-legged America, Europe, Japan economic stool possibly collapsing. JAPAN'S DOWNTURN

WASHINGTON lawmakers and finance officials, vexed by America's economic problems, are now wary of the impact of Japan's economic downturn on the United States.

A senior US Treasury official says worries here about Japan's financial slide reflect inextricable links between the world's economic powers. "The global economy is like a three-legged stool," he says, "with the United States, Japan, and Europe acting as the supports. If one of those legs is weakened, the stool could collapse under pressure."

Credit and export markets for American goods are essential to the US recovery from recession, and the American public and private sectors rely in a degree on Japanese financing for loans and investment. US exporters have banked on increasing Japanese demand for their goods. Further, imports from other countries, including European nations use US-produced components in their products exported to Japan.

The Senate Banking Committee, chaired by Sen. Donald Riegle (D) of Michigan, held a hearing April 17 on the implications of Tokyo's turbulent stock market - the 225-member Nikkei index - which has lost roughly half of its value since its 1989 peak. Called to testify, Federal Reserve Board chairman Alan Greenspan acknowledged that Japan's banks, corporations, and financial houses have seen their assets atrophy, due largely to plunging real estate values. But he said fears that the firms will liquidate th eir US holdings and retreat from any further financial exposure in the US are "exaggerated."

Senator Riegle and Sen. Paul Sarbanes (D) of Maryland pressed Mr. Greenspan with questions about whether Japan's tightening financial situation will hinder the US government's ability to finance its deficits, reduce the availability of business credit, and dampen domestic expansion and foreign markets for US manufacturers.

Chairman Greenspan tried to allay concerns about the reversal of Japan's position as a net capital exporter to a capital importer. But given the higher international capital requirements now imposed on Japanese banks, whose asset values have plunged during the past year, Tokyo's purse strings have already tightened.

The Fed chairman acknowledged that "Japanese banks may choose to protect their traditional domestic business base and ... to pare back their loans to some of their new customers, including those in overseas markets."

If assets in Tokyo continue to shrink, Japan's US loans and investments will decline further, Greenspan said. But he is confident European banks will supplant the Japanese. "It does not strike me as a problem for American borrowers, because there are alternate sources of finance," he said. Mr. Riegle said that Japan's withdrawal from US treasury and mortgage-backed securities markets over the past two years may have led to higher long-term interest rates and less capital "than otherwise would be the cas e."

The Bush administration has long seen lower interest rates as the only real lever for spurring economic growth.

Greenspan's upbeat review of the nation's economic performance for 1992's first quarter is based largely on the effect of lower rates. The economy grew at an annual rate of 2 percent, a marked increase from the very sluggish 0.4 percent during the last quarter of 1991. Construction of new homes and apartments, up 6.4 percent from February to March, marked the highest level since spring of 1990. Housing is an important barometer of US economic activity.

The Fed chairman said the US recovery is "going at a modest pace, but it is progressing." To further fuel recovery, Greenspan recently cut the federal funds rate, the interest rate that banks charge each other for loans and an important determinant of the prime rate, the rate banks charge their better customers. The 0.25 percent cut is designed to help ease individual and corporate debt burdens and to induce consumers to spend more.

Mr. Sarbanes reminded Greenspan that he called for the Fed to lower interest rates last March, when the unemployment rate registered a troubling 7.3 percent, the highest rate during the US recession. Greenspan responded that while he and other policymakers on the Fed's board are "acutely aware of what is going on in international financial systems," the primary concern, developed before the Nikkei's marked decline earlier this month, was "the dullness in the American financial system." The US economy, he

said, is struggling to produce ample money for personal, business, and government credit, and to attract borrowers. Hence the Fed's move to drop rates.

Securities and Exchange Commission chairman Richard Breeden told the committee that "Japanese investors remain the largest foreign participants in the US government bond market, but their percentage share of participation has declined in recent years." Wall Street worries persist that Tokyo investors will sell off US holdings to raise cash needed in Japan.

Greenspan and other central bank governors and finance ministers from the Group of Seven leading industrial countries - the US, Britain, Canada, France, Germany, Italy, and Japan - will meet in Washington later this week to discuss economic and monetary policies. With much of Europe in a recession, Japan on the brink, and the US slowly emerging from economic doldrums, international coordination in growth-oriented policies is now the G-7's greatest challenge. "Cross border trade in goods and services is i ncreasing at a much faster rate than domestic gross national products," says the Fed chairman.

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