TOKYO, Oct. 16 (Kyodo) - Japan should redouble its efforts to clean up its debt-laden banking sector to climb out of the country's decade-long economic slump, a top U.S. economist said Tuesday.
"I really think the outlook for Japan...all depends on when it comes to grips with the problem of the banking system," Fred Bergsten, director of the U.S. Institute for International Economics, told a press luncheon in Tokyo.
Bergsten said disposing of Japanese banks' massive bad loans would be the only way for Japan to regain economic vitality. While it may take a number of bankruptcies, a much worse economic performance or even some runs on banks, "Japan will eventually have to do so," he said.
Bergsten also said the Bank of Japan (BOJ) should set an inflation target to head off deflation, a deadly economic condition in which domestic prices continue to fall, cutting into corporate sales while boosting the real value of borrowings.
"We do recommend the Bank of Japan should set a positive inflation target of 1-3% and take policy steps necessary to try to get Japanese prices rising again as soon as possible," he said. But Bergsten did not support a proposal for the BOJ to sell the yen against the dollar in currency markets as a means to boost yen liquidity to cope with deflation.
"On balance, it would not be a good idea to...cope with deflation by trying to depreciate the exchange rate," he said, adding it would otherwise invite criticism in the United States as it is already running a huge trade deficit.
Commenting on the U.S. economic outlook, Bergsten was very optimistic despite growing signs of slowdown especially since the Sept. 11 terrorist attacks on New York and Washington.
"I have a very optimistic view about the U.S. recovery over the next six to 12 months, and with it, probably about the rest of the world as well," he said.
Bergsten said the U.S. has seen fundamental improvements in its competitiveness and productivity during the second half of the 1990s.
"The U.S. turnaround is fundamental and will continue," he said.
With huge economic stimulus provided by the U.S. Federal Reserve and the U.S. administration over the past nine months, he said, the U.S. economy is likely to be back on a 3.5-4% growth path by the second half of next year.