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Economist Criticism Shorts In Japan Hubbard*

[ending short-selling reduced instability, prices rose 20% and this economist talks gobbledygook.]

March 20, 2002

U.S. Economic Official Voices Skepticism

About Japan's Moves to Bolster Economy



TOKYO -- The chief economic adviser to U.S. President George W. Bush took a swipe at recent Japanese government steps to boost the country's economy, saying he "didn't understand" moves to restrict certain stock-market transactions.

Speaking at an economic conference in Tokyo, R. Glenn Hubbard also said Tokyo's slowness in taking steps necessary to promote recovery stemmed from an unwillingness to admit past mistakes.

Mr. Hubbard's unusually blunt critique of Japan's approach to treating its decade-long economic slump comes at a sensitive time for Japanese policy makers. The government last month announced a plan to tackle deflation -- the persistent price declines that are eroding corporate balance sheets -- with a combination of monetary easing, tax overhauls, and aggressive action to clear up banks' bad loans. Yet the administration of Prime Minister Junichiro Koizumi hasn't detailed how it plans to deliver on those promises.

The "anti-deflation" plan contained few new, concrete steps, besides a set of measures aimed at curbing short-selling of stocks -- the practice of selling borrowed shares in the belief that prices will fall, with the intention of repurchasing them later at a cheaper price. Politicians had been blaming short sales for a February fall in Japanese stock-price levels to 18-year lows.

Mr. Hubbard on Tuesday expressed skepticism about the measures, which were implemented so quickly that many stock-brokerage firms and Japan's stock exchanges couldn't update their computer systems in time. Japan's benchmark stock index has risen 20% since the steps were unveiled, leading some critics to say the government was merely trying to prop up the stock market -- and save companies from large stock losses -- before the end of the fiscal year on March 31. Japanese regulators deny any such attempt.

"I do not understand the need for new restrictions and tighter supervision of short-selling of equities, particularly when they are introduced before market participants and the exchanges have their systems in place to ensure compliance," [was compliance. Govt said no shorts, so Japanese brokers executed no shorts.] Mr. Hubbard said, according to a transcript of his remarks released by the U.S. Embassy. "This can only distort the valuable signals sent by the equity market, reducing liquidity and dulling the positive reception that true reform measures would receive." [bullshit--what valuable signals? seems increased liquidity from rising prices ... what "dulling the positive reception that true reform measures would receive." What happened was Japan closed the on door of decapitalism (shorting) that waste time and money and creates instability that is the cannon fodder of stock brokers.--RSB]

Mr. Hubbard also called on the government and Japanese banks to be more aggressive in tackling nonperforming loans and corporate restructuring, steps he called essential for promoting a productive allocation of capital -- and thus a sustainable economic recovery.

Those steps haven't been taken yet, he said, because bank managers fear they would reflect "poorly on past management decisions," while regulators think they would "call into question past regulatory practice." Mr. Hubbard also fingered Japanese politicians for delaying the corporate cleanup, saying that Japan's political system makes it hard to take "tough actions that disadvantage key constituencies."

Yet Mr. Hubbard also praised the much-criticized Bank of Japan, saying that the central bank has started to deliver the kind of monetary easing necessary for a comprehensive economic fix. Japan's central bank is pumping out so much money that the monetary base grew 27.5% in February compared with the previous year.

Write to Phred Dvorak at phred.dvorak@wsj.com1.

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