U.S. economy still ailing as QE2 nears its end
The U.S. economy is limping along and its future looks uncertain. The steering of financial policy is becoming increasingly difficult.
The U.S. Federal Reserve Board decided to end, as scheduled at the end of June, the second round of its quantitative easing policy, known as QE2, which has been implemented on an unprecedented scale since November.
The Fed's program has purchased 600 billion dollars in U.S. Treasury bonds and increased the supply of funds to the financial market. It was a last-ditch measure aimed at shoring up the economy and containing deflationary concerns at the same time.
As a result, long-term interest rates have gone down, encouraging companies to increase capital investment. As U.S. stock market prices have gone up, personal spending has increased. Deflationary concerns are subsiding.
However, the negative side effects were significant. A huge amount of money from the United States filled markets around the world, raising crude oil and crop prices. Inflation has become conspicuous, especially in emerging countries.
We agree with the Fed's judgment that the quantitative easing policy has fulfilled its role for the time being.
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Fed keeps zero-interest policy
The Fed has indicated its resolve to maintain a policy of virtually zero percent interest rates and to keep the federal funds rate, which is a target for short-term interest rates, at its current level.
If the Fed hurriedly adopts an "exit policy" such as a measure to return interest rates to their levels before the global financial crisis, it will cool the business climate and harm the global economy.
The Fed should be very careful in deciding the timing of a transition to a tighter monetary policy.
However, one problem is that the momentum of the economic recovery is still weak.
The U.S. real economic growth rate in the January-March quarter dropped to 1.8 percent on an annually adjusted basis from the previous quarter.
U.S. manufacturers were forced to reduce production because the supply of parts from Japan became bogged down as a result of the Great East Japan Earthquake. Economic stagnation has continued in the April-June quarter. Unemployment remains high at the 9 percent level.
If the economy slows down further, can the Fed take any additional effective measures? Interest rates in the United States are certain to remain extremely low for a long time.
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Stop overly strong yen
However, Japan must be cautious about the fact that the yen has been growing stronger against the dollar in connection with the low U.S. interest rates. U.S. authorities apparently have approved the weakening of the dollar, which is an advantage in exporting U.S. products abroad.
Stricken by the March 11 earthquake and tsunami, the Japanese economy has fallen into negative growth. The earnings of Japanese automobile and other export-oriented companies will decrease if dollar-selling based on the U.S. situation leads to excessive appreciation of the yen. It will eventually lead to serious circumstances in which efforts to repair damage from the disaster will be hindered.
When the yen's appreciation skyrocketed in mid-March, Japan, the United States and some European countries undertook a coordinated intervention and succeeded in putting a brake on the soaring yen.
Likewise, the government and the Bank of Japan should take decisive action to hold the market in check and prevent the yen's excessive appreciation.
Enough procrastination: Govt must act on Futenma
The government must make serious efforts to prevent a situation in which the U.S. Marine Corps' Futenma Air Station in Okinawa Prefecture remains permanently in its present location.
A long time after his previous visit to the prefecture, Prime Minister Naoto Kan traveled there again on Thursday, the anniversary of the end of the Battle of Okinawa, and held talks with Okinawa Gov. Hirokazu Nakaima.
However, according to Nakaima, they did not discuss the issue of U.S. bases, including the Futenma relocation issue, at all.
During Tuesday's meeting of the Japan-U.S. Security Consultative Committee, the two countries confirmed afresh that the Futenma Air Station should be relocated to the Henoko district in Nago in the same prefecture. U.S. Defense Secretary Robert Gates asked the Japanese side to realize "concrete progress" within one year.
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Is Kan serious about relocation?
Kan, however, did not discuss the issue with the Okinawa prefectural governor. Does he actually have any intention of dealing seriously with the Futenma issue?
Since he assumed office, Kan has visited Okinawa Prefecture three times. On last year's observance marking the end of the Battle of Okinawa, Kan asked for Nakaima's cooperation with Futenma's relocation to the Henoko district. Nakaima, however, only said the situation in Okinawa Prefecture is "quite tough."
At that time, Nakaima did not totally rule out the possibility of relocating the air station to Henoko. However, Kan simply stood by as Nakaima changed his stance to "relocation outside the prefecture."
The characteristic of the Kan administration is again seen here: Raising grandiose targets and then procrastinating over them rather than making concrete efforts to achieve solutions.
A full 15 years have passed since Japan and the United States agreed in April 1996 to return the land on which Futenma Air Station sits to the prefecture. More than 80 billion yen has been spent on economic promotion programs in the prefecture's northern area, including Nago, alone. This massive expenditure of public money and effort should not be allowed to come to nothing.
The administration of former Prime Minister Yukio Hatoyama sought in vain for ways to relocate the Futenma airfield outside of the prefecture, resulting in what has been referred to as a "loss of time," which Defense Minister Toshimi Kitazawa tried to explain away as "a cost entailed in democracy" due to the change of government.
This is an incredible excuse.
The current aggravation of the Futenma relocation issue may develop into a situation that can hardly be dismissed as a "loss of time." Such a serious mistake in government policy can hardly be justified simply by mentioning the change of government.
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Don't miss historic chance
If the Henoko relocation plan fails, not only will the Futenma Air Station remain where it is, but the relocation of 8,000 U.S. marines from Okinawa Prefecture to Guam may also become a subject for reconsideration. Okinawa Prefecture could very well miss a historic chance to lighten the burden of hosting U.S. bases.
During the so-called two-plus-two talks, both nations reconfirmed that the return of six U.S. military facilities in the southern part of the prefecture, including Futenma Air Station, is to be steadily implemented. The government must show clear steps toward returning the facilities to the prefecture as soon as possible and must begin consultations with the prefectural government about the future use of the sites.
The government plans to extend the current Okinawa Prefecture promotion and development plan, which was originally scheduled to expire at the end of the current fiscal year. Moreover, it plans to allow the prefecture to map out its own plan on behalf of the central government in a new program to succeed the current one. It is even contemplating no-strings lump-sum grants.
It is important for the government to respect the local government's requests and rebuild mutual trust in order to move the Futenma issue forward.
It may be a good idea for the government to discuss with the prefecture the idea of relating the return of U.S. military bases to new types of development measures to bid farewell to the prefecture's base-dependent economy.
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