Industrial rebound puts nation back into world economic leadership

PARIS -- For the first time in a decade, the United States has resumed leadership in determining world economic and financial policies, with troubled Germany and Japan falling meekly into step behind Washington.

The change reflects America's industrial rebound since the early 1990s. Even more, it stems from growing doubts over how well the Germans and Japanese will solve their mounting domestic economic woes. In the recent past, these countries have been the main challengers to U.S. primacy in shaping global trade and monetary strategy.

Britain's Financial Times noted last week that Japan and Germany - - in return for a stronger dollar, which they want to help them out of their hole -- appear willing to follow America's lead.

It's a far cry from the time when many German and Japanese officials proclaimed that America's dominant role in financial policymaking had fallen victim to a rapidly declining U.S. economy.

The disclosure in late May that Japan's 11 biggest banks had suffered their worst losses in history, writing off more than $47 billion in bad loans during the previous year, was the culmination of many developments that have rocked the Japanese economy.

Although the huge bad-debt write-off was said by Japanese officials to mark a turning point in a financial crisis of almost unmatched dimensions, some experts warned that Japan's banking system still has a long way to go before it is out of danger.

According to James Lederer, a London-based specialist on the Japanese financial and securities markets, the biggest problem is that no one knows precisely how much remains of the bad debt that resulted from Tokyo's burst property boom in the 1980s.

"A financial panic remains a possibility."

One result is that the badly shaken Japanese have eased their confrontation with the United States over trade.

Japan's once-staggering trade surplus, the target of incessant American recriminations, has at last begun to fall dramatically. In April, it plummeted by nearly two thirds -- triggering a rise in the dollar against the yen that has continued ever since.

Although some of this surplus decline resulted from Japanese companies transferring production abroad, Lederer said Japan is now seriously attempting to appease America, knowing that "the balance of economic power has again shifted in the direction of the United States."

In view of the uncertain outlook for their financial system, the Japanese recognize they can no longer antagonize Washington, he said.

Meanwhile, Germany's home-grown difficulties over unemployment, uncompetitive production costs and labor unrest have begun to weaken the previously impregnable deutschmark and jolt that country's economic policymakers out of their self-confidence.

The powerful central bank, the Bundesbank, in particular, has exhibited unaccustomed signs of humility -- conceding that its single-minded emphasis on controlling inflation has been overtaken by events and has proved inadequate for maintaining economic expansion.

The Bundesbank's critics, who include some of its former senior officials, argue that its anti-inflationary policies led to an over- valued currency, helping to make German goods too expensive for the rest of the world.

Now that the economy shows cracks and the deutschmark is under assault, the Bundesbank critics are accusing it of lacking fresh ideas to deal with a radically changed situation.

Paris-based financial analyst Georg von Horvath noted that "the German authorities have started slashing interest rates and intervening in the money markets in keeping with the longstanding recommendations of (U.S. Federal Reserve Chairman) Alan Greenspan, which they mainly ignored before."

Von Horvath said the Germans have begun "telephoning Washington" to seek advice on what to do next. The Bundesbank, he said, is "eating humble pie."

Copyright 1996
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