Headline: The Spreading Gloom; Japan Feels the Brunt of Economic Woes, But Pressure Increases on Europe and U.S.

Source: International Herald Tribune, 15 June 2001

URL: http://www.iht.com/cgi-bin/generic.cgi?template=articleprint.tmplh&ArticleId=22931

The economic gloom weighing on the world's financial markets deepened Thursday after reports from Japan, Europe and the United States suggested a further downhill drift.

In Japan, where the situation is grimmest, the government warned that the nation already may have lapsed into its fourth recession in a decade.

The European Central Bank, which until now had kept a guardedly upbeat tone, on Thursday cautioned that the troubled "international environment" might deliver a bigger blow to Europe's economy than previously expected.

The reports came a day after the Federal Reserve Board in Washington, denting some of the recent optimism about a quick recovery, said the U.S. economy was barely growing and was suffering from broad-based weakness across many industrial sectors.

Taken together, the reports increased unease among investors worldwide. In late trading, stocks were sharply lower on Wall Street, and in Europe, prices were generally down between 1 percent and 2 percent.

"It cannot be excluded that the international environment could develop less favorably than assumed," the European Central Bank warned.

The ECB downgraded its outlook for growth in the 12 nations that have adopted a single currency, even as it raised its inflation forecast.

The twin problems of slowing output and rising prices have painted the bank into a corner. Despite criticism from some economists that a restrictive credit policy has contributed to the slowdown, the ECB now has little flexibility to lower interest rates because of the worrisome surge in inflation.

Euro-zone growth should fall to between 2.2 percent and 2.8 percent this year, the ECB said, lower than the 2.6 percent to 3.6 percent range it predicted in December. Even at the lower end of the new projections, the ECB remains more optimistic than private economists, who expect growth of about 2 percent. Last year, the region grew at the brisk rate of 3.4 percent.

In Tokyo, the government released its own monthly report for June, which concluded that "the economy is deteriorating." "Although we have yet to be able to arrive at a conclusion, there is a strong possibility that the economy has entered a recession," said Haruhito Arai, a government economist.

Japan, the world's No. 2 economy, was last in recession only two years ago. This week it reported that its gross domestic product contracted by 0.2 percent in the first three months of the year.

"I would expect the April-June figure to worsen," said Finance Minister Masajuro Shiokawa. With two consecutive quarters of declining output, Japan would again meet the technical definition of a recession.

Although politicians renewed their calls for the Bank of Japan to do something to rescue the economy, the bank essentially exhausted the limits of traditional monetary instruments when it lowered interest rates to almost nothing in March.

"With interest rates at zero, it's like printing money," said Michael Dicks, chief European economist in London at Lehman Brothers.

But even that has not worked. The country's woes are compounded by a deeply troubled banking system still burdened by massive problem loans that discourage new lending. Corporate bankruptcies, meanwhile, surged in May to their highest level this year, according to Teikoku Databank Ltd.

Rebuffing Japanese politicians' pleas for new steps to add liquidity to the economy, Masaru Hayami, the Bank of Japan governor, said, "We are not in a situation where we must add new policy measures."

In the United States, the Federal Reserve Board has aggressively cut rates in an effort to stimulate the economy. And after the latest data, economists believe the central bank might be prepared this month to cut rates for the sixth time in a half year.

The Fed gained latitude to lower interest rates from numbers released Thursday indicating that inflation remained in check in the United States. Producer prices rose 0.1 percent last month, the Labor Department said; the core rate, which excludes volatile food and energy costs, rose 0.2 percent.

The Fed's regular bulletin on regional economic conditions, issued Tuesday, cataloged weakness in virtually every sector, except drilling for oil and gas. "Economic activity was little changed or decelerating," the Fed said.

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[My comment: << "It cannot be excluded that the international environment could develop less favorably than assumed," the European Central Bank warned. >>

So, it's not just Greenspan who talks like this. What, do all Central Bankers take locution lessons from Yoda?]

-- Andre Weltman (aweltman@state.pa.us), June 15, 2001

Answers

Looks to me like the 30-year treasury bond market is about to blow sky high.

I would think that now is the time to buy long, or bond calls on the commodities futures market.

-- JackW (jpayne@webtv.net), June 15, 2001.

Or, buy Puts on the S & P 500.

-- Big Cheese (bigcheese@multimax.net), June 15, 2001.

These are all clear, unmistakable signs of a recession. How bad? How long? Who knows? But, when Greenspan cuts rates 250 basis points since the first of the year, and it takes till a month a ago for 10-year rates to follow, then just recently short rates go down, with long-term rates still up, it shows the great hesitancy to believe on the part of Wall Street. Long term rates always follow the Fed's cutting. When they do, recession will be in full bloom.

-- Wellesley (wellesley@freeport.net), June 16, 2001.

This sense of worldwide systemic economic stress, with the specter of cascading debt defaults looming, might be why the gouging of California by electrical generators seems to have suddenly abated.

California's insolvency and bankruptcy might be enough to send the world financial system over the brink. Hence, very high powers (including but perhaps not limited to Greenspan and the Federal Reserve Corp.) might be quietly but strongly pressuring "Bush & Co." to let California at least partially "off the hook."

-- Robert Riggs (rxr.999@worldnet.att.net), June 16, 2001.

California's being on the ropes could be the reason...and add the telecom debacle to the Dot Com disaster, and you have the perfect one, two punch.

Scary!!

-- Lael Green (lael7621@aol.com), June 17, 2001.