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Greenspan criticizes Japan
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September 27, 1999: 7:07 p.m. ET
Says Japan needs to diversify financial system, cut reliance on banks
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WASHINGTON (CNNfn) - The Japanese government has yet to make significant progress in diversifying its financial system, which could be a key element to economic recovery, Federal Reserve Chairman Alan Greenspan said Monday.
Speaking at the International Monetary Fund-World Bank annual meetings, Greenspan said the East Asian crisis may not have been so bad over the past 18 months "had those economies not relied so heavily on banks as their means of financial intermediation.
"Before the crisis broke, there was little reason to question the three decades of phenomenally solid East Asian economic growth, largely financed through the banking system, so long as the rapidly expanding economies and bank credit kept the ratio of non-performing loans to total bank assets low," Greenspan said. "The failure to have backup forms of intermediation was of little consequence. The lack of a spare tire is of no concern if you do not get a flat," he said.
Critical of Japan
His remarks capped a difficult week for Japan, which has borne more than its share of negative sentiment here at the IMF-World Bank meetings. The Japanese government has been criticized by officials in recent days for its lack of action in stopping the appreciation of its currency against the U.S. dollar - a move seen as potentially damaging to its fragile economic recovery.
Greenspan's speech focused on the U.S. banking and financial system, which he characterized as more diverse and liquid than many of its global counterparts. The diversity of the U.S. banking and capital system, Greenspan said, are what saved the economy from catastrophe almost a year ago, when Russia's debt crisis prompted lenders to stop lending and borrowers to demand huge premiums to hold U.S. securities.
Japan did not have the same kind of diverse banking and capital system. While its government is now injecting funds back into the country to recapitalize its banks "it has yet to make significant progress in diversifying the financial system, which arguably could be a key element, although not the only one, in promoting long-term recovery,'' Greenspan said.
Australia test case
The same goes for Thailand, he said. If that country had a more diversified banking and capital market system in place in June 1997, the decline in value of the Thai baht "might well have been far more benign,'' Greenspan said. The Thai currency's massive drop left holders of the baht unable to repay their loans and triggered a wave of currency crises in the Far East.
"Australia serves as an interesting test case in the most recent Asian financial turmoil," the Fed chairman noted. "Despite its close trade and financial ties to Asia, the Australian economy exhibited few signs of contagion from contiguous economies, arguably because Australia already had well-developed capital markets as well as a sturdy banking system."
More than 800 mostly blue- and gray-suited individuals turned out to hear the Fed chief speak. Some media were turned away due to the high demand for seating at the 45-minute event. Greenspan was whisked away immediately following his remarks, unavailable for questioning by delegates or the press.
His remarks come a little more than a week before Fed policy makers meet to discuss whether U.S. interest rates need to be nudged up yet again to ensure the economy doesn't grow too quickly and spur more rapid inflation. Fed officials last gathered around the oak table in Washington on Sept. 24, when they decided to lift the trend-setting fed funds rate a quarter point to 5.25 percent.
In currency trading in New York, the dollar rose sharply against the yen Monday after Japan indicated it will weaken its currency to protect the country's fragile economy. Just before 3:30 p.m. ET, the dollar rose to 106.98 yen from 104.19 Friday, a 2 percent gain in its value.
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