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"Those Terrorists Were Acting Globally"

When it comes to negotiating global economic shocks, Eisuke Sakakibara has been there, done that. Serving as Japan's Finance Vice-Minister for International Affairs during the 1997 and 1998 financial crisis that swept through Japan and other regional economies, Sakakibara urged the International Monetary Fund to drop its one-size-fits-all approach to crafting stringent fiscal bailouts for South Korea, Thailand, Indonesia, and elsewhere.

He's also a skeptic of what he calls the "free market fundamentalism" in Washington. In the wake of the Sept. 11 terrorist attacks, Sakakibara, who now heads the Keio University's Global Securities Research, recently talked with BusinessWeek Tokyo Bureau Chief Brian Bremner to assess the economic damage to Japan and Asia, Prime Minister Junichiro Koizumi's policies (see "Tremors from Sept. 11 Shake Japan"), and the future of economic globalization. Here are edited excerpts from their conversation:

Q. What is the economic fallout for Japan and the rest of Asia?

A. I think it is quite serious because Japan was already in recession before the incident. And many other Asian economies were heading into recession, as well. The attack only exacerbates the situation. I think Japan will fall into a fairly deep recession.

Q: Do you foresee something on the scale of the Asian financial crisis?

A: Well, 1997 and 1998 was a financial crisis. And there is a possibility [this latest shock] could develop into a financial crisis. The information technology bubble has burst, the airlines and other sectors are being hurt. It probably will have an impact on the financial sector, as well.

Q: In this period of uncertainty, are you worried about a big disruption in international capital flows?

A: [Former U.S. Treasury Secretary] Bob Rubin once remarked that if there were anything that would reverse the trend toward globalization, it would be the terrorists. This trend toward globalization may not reverse, but it will slow down significantly.

So this is a major incident, and the world will be different. There will be much less airline-passenger traffic and exchange of people across borders. The transfer of goods will become more costly. And the coordinated attempt to control money laundering will probably have some impact on capital flows. International finance has always had this kind of anonymous aspect. If you want to hit the terrorists, you will hit other people, as well. All this is going to change the world significantly.

Q: In the latter part of the 1990s, there was a lot of euphoria in the U.S. about the positive impact of unfettered capital flows, free trade, and economic integration. But much of the emerging world hasn't benefited. Does globalization have a future?

A: Look, everybody has to fight against terrorism. Having said that, there is light and shadows from globalization. This terrorism is one of those shadows, the darkest aspect. Those terrorists were acting globally. They were taking advantage of free flows of capital, free flows of people, and so on.

We have to recognize that there are problems with globalization. Behind the terrorism, there is abject poverty, particularly in Afghanistan. We have to fight against terrorism, but at the same time we need to think through what globalization means to the world.

Q: Once the current terrorism threat subsides, do the rich world and the Group of Eight have to start thinking about policies and economic aid that helps the impoverished who might be attracted to extremism?

A: We need to listen more to the voices of the developing countries. There is a forum called the Group of Twenty. The leadership of the Group of Eight is fine, but we need to widen the scope of international cooperation. What types of cooperation [will be required is something] we will really have to think through. Debt reduction is one thing. There are absolutely poor countries in Africa and in Central Asia. How we deal with those issues is very important.

Q: Early on, the Bush Administration took a skeptical view of the International Monetary Fund and its role in bailouts. Now, the IMF, which is dangling loans to Pakistan and others, seems almost like a foreign policy asset of the U.S. Is this a good thing?

A: The Bush Administration has become [filled with] realists. Before, they were quite ideological. And that's fine. But having said that, I think we need to sort of reevaluate international institutions such as the IMF, World Bank, and the World Trade Organization. They have played very important roles in the past, but they need to change.

Throughout the East Asian crisis, they placed too many conditions on those countries affected. In some cases, they opened these countries a little too early without preparing them for the global markets. The supervision of the banks was far too insufficient, but they opened their capital accounts. That was wrong. We need to restructure the financial architecture, which we have been discussing since 1998. But this incident will give intellectual stimulus in that direction.

Q: What is behind the recent strength of the yen, which could have grave implications for Japanese exporters?

A: The Japanese economy is in deep recession. And the fundamentals of Japan are weaker than those of the U.S. There is no reason then, based on the fundamentals, that the yen should appreciate. The markets reacted to this shock and the immediate economic impact to the U.S. in the short run. I think eventually it will settle down, and the Japanese government is intervening in the currency market, and I think rightly so. But I don't think this appreciation is going to continue.

Q: Prime Minister Junichiro Koizumi's government has come up with a new bank bailout plan that would expand the role of the Resolution Credit Corp., a workout vehicle similar to the U.S. Resolution Corp. Will this work?

A: The government's plan is a little lukewarm. It could have tougher nonperforming-loan policies. I think the use of the RCC is fine. But it needs to buy not only nonperforming assets but also the loans in the gray-zone. So the RCC is going to buy them from the banks and think of a scheme where they could use the markets to restructure the borrowers [via securitization, debt workouts and debt for equity swaps.]

The idea of using the Bank of Japan [to fund the RCC operations] should also be [explored]. The Bank of Japan could buy bonds issued by the RCC, and the government could guarantee those bonds, so the central bank would not have any problem with this. That would be a very good monetary policy. Because right now they are supplying a lot of money to the money markets, but that money isn't going anywhere. Banks aren't lending. That money is going into the Japanese government bond market.

Q: Given the price deflation in Japan, should the Bank of Japan take the radical step of adopting an inflation target?

A: I think the BOJ should adopt an inflation target. To do so probably won't have any immediate impact, and I agree with the BOJ [which objects to the idea] on that. But it probably would have a psychological impact. Adopting an inflation target and engaging in unsterilized currency interventions, while providing loans to deal with the nonperforming asset issue, is the policy the BOJ should pursue.

Q: A lot of economists are urging Koizumi to drop his plans to cap new government bond issuances at 30 trillion yen, or about $255 billion. Should Japan forget about its massive budget deficit for now?

A: No, no, no. Fiscal stimulus should be avoided at all costs. One possible risk scenario is a collapse of the Japanese government bond market. I'm sure that if we come up with a big supplementary budget, Moody's and Standard & Poor's will come around and downgrade. That would be a disaster. Then there would be selling and panic.

So no packages, and we should stick to 30 trillion yen. But even if he sticks to that goal, he may not be able to achieve it. There will be a major downfall in tax revenues next year.

Q: Koizumi and other conservatives think Japan should rewrite its war-renouncing Constitution and be able to defend itself militarily. Japan is now sending ships to provide logistical support to any U.S.-led military action in Central Asia. Is Japanese foreign policy in for a sea change?

A: I think so. And public opinion is slowly changing. My opinion is very clear: We should change the Constitution. The Japanese people haven't come that far, but we need to become a normal nation.

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