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To: Winzer who wrote (36398)	7/3/1999 9:21:00 AM
From: Rarebird	Read Replies (1) \| Respond to of 116759

Why "Mr.Yen" is leaving his post? Mr Yen blows through lest the bubble burst Asia-Pacific, By Peter Hartcher It was confirmed during the week that one of the world's top finance officials, Japan's Eisuke Sakakibara - known as Mr Yen - is about to retire from his job as the country's main international negotiator. But why? He told an acquaintance that he decided not to press for another year in the post because he expected that Wall Street would crash during that time, and he did not want to be around to try to deal with the consequences for Japan. It was Sakakibara who first conceived the brilliant nickname for the US economy - bubble.com. The US is vulnerable, he says, to the possibility that the internet-led stockmarket bubble will burst with awful consequences. It would not only drag down the US economy, he fears, but jeopardise the entire system of global capitalism. It is quite extraordinary, of course, that the vice-minister for international affairs at Japan's Ministry of Finance should utter such thoughts aloud. Apocalyptic pronouncements from a responsible official are potentially destabilising. And the Americans, Sakakibara's closest and most important allies, hate it. But his warning does serve as a sobering reminder of the awesome challenge that the US faces. The Federal Reserve's Alan Greenspan is working to bring the eight-year US boom to a gentle moderation, a soft landing. The problem is that history shows hard landings are infinitely more likely to occur, producing wrenching recession. Greenspan's decision to raise interest rates by the barest possible increment during the week - and then saying that no more action is contemplated at the moment - shows him to be like the comical minesweeper of schoolyard humour. He is advancing gingerly into the minefield with his hands over his ears, feeling his way forward with one foot outstretched, tentatively tapping the ground. He has to expect that his leg might be blown off at any second and is moving with terrified caution, and without equipment of any sophistication. Greenspan may be the world's most powerful central banker, but he is still armed with nothing more than two old-fashioned instruments of words and interest rates. The US is nurturing a technological revolution at its economic breast at the moment. That is not in doubt. The key question to ask of Wall Street, however, is this: Are investors pricing the effects of this revolution correctly?The stockmarket can only ever represent the value of the companies in the economy it represents. A simple and obvious point, yes. So how do you explain this? The total value of the US stockmarket has been the equivalent of around 50 per cent of the total output of the US economy, on average, over the past 60 years. Today it is around 150 per cent. In other words, the market has historically been prepared to value a dollar of economic output at 50¢. Today the market values that same dollar of output at $1.50. Why should this historical relationship swerve so violently away from standard? Is it possible that stocks today could be worth three times the amount of real economic activity that they have traditionally represented? The orthodox answer is that the technological revolution is transforming the productive power of that economy, and so the old rules no longer apply. The Bank for International Settlements, the Swiss-based club of the rich-world's central bankers, is not so sure. It is sometimes argued that the effects of recent high-tech investments may be especially large because they embody significant technological advances. However, while computers have been a major component of recent investment spending, they still account for only 2 per cent of the net non-residential capital stock. Thus, even if the returns on investment in computers are higher than for other types of equipment, their effect on aggregate productivity growth has been relatively modest until now. No-one, naturally, can be sure of the future, and the BIS hedges by saying that computers may become an important source of productivity advances in future years. But until and unless that happens, any pricing of the technological revolution must be speculative. Sakakibara has to have an even chance of being right that a surge of money is simply pushing stock prices to unreasonable levels, creating that oldest of investment phenomena, a speculative bubble waiting to burst. In this view, the market is valuing a dollar of economic output at $1.50 not because investors seriously expect this to be the correct level, but just because a wave of hyper-liquidity is chasing a limited number of stocks and pushing prices to ridiculous heights. And Sakakibara has seen this phenomenon at close quarters in Japan's bubble economy of the late 1980s. But it is also possible that he has other motivations. A top official in a rival Tokyo ministry says that Sakakibara was not offered the option of another year in the job, but that he has been forced out by the seniority system of the Japanese bureaucracy. And officials in the US Treasury suspect privately that Sakakibara's attacks on the US may be partly tactical - designed to deflect US criticism of Japan's spectacular economic mismanagement of the last decade. One thing seems certain, however. They will not be rid of him. Sakakibara, an extremely accomplished intellectual as well as one of the world's most high-profile finance officials, will be leaving the ministry in a month or so and will spend some of his time writing and lecturing, including during a visiting professorship at the Australian National University. In this new incarnation, the US economist David Hale sees Sakakibara emerging as a leading spokesman for Asia, an advocate of Asian solutions for Asian problems and an challenger of US policy. The best way for the US to disarm him, of course, would be by a soft landing. Good luck, Dr Greenspan. afr.com.au