By Anne D. Picker, International Economist,Econoday
Monday, December 3, 2001

Overseas equities markets couldn't quite decide last week whether the U.S. economy really would bounce back or by how much as economic indicators continued to paint a mixed picture. And given the globalization of investment flows, how much would the Enron debacle hurt banks and other financial intermediaries? A pervasive force throughout the economies followed here was the sharp decline in consumer and producer prices. With inflation a nonexistent problem - thanks to sinking oil prices - investors are looking with increasing urgency to the central banks to ease their pain.

Both Fitch and Standard & Poor's lowered Japan's credit rating. Fitch cut its rating on Japanese government bonds to AA from AA+, warning the national debt will keep rising as the government tries in vain to spend its way out of an 11-year economic slump. Fitch said the Japanese government is in denial over the severity of the economic problems it faces. The rating cut means Japan now ranks alongside Taiwan, Slovenia and Portugal at the AA level.

Japan's credit rating also was lowered by Standard & Poor's for the second time this year, which said yet another cut is likely if Prime Minister Junichiro Koizumi drags his feet on election promises to end the prolonged economic slump. The reduction to a third-rank AA rating was prompted by the slow progress in enacting Koizumi's popular mandate to clean up banks' bad loans, curb the bureaucracy and cap government spending on public works. Japan joins Italy as lowest rated members of the Group of Seven industrial nations.

The Bank of Japan kept monetary policy on hold, waiting for the prime minister to make progress on the loan cleanup. Unless the government carries out its promise to clean up an estimated 151 trillion yen ($1.2 trillion) of lenders' bad loans, the central bank can do little to pull Japan out of its fourth recession in a decade. Japan's top 13 banks wrote off a combined 2.3 trillion yen in bad loans during six months ended September. Still, their outstanding bad loans expanded 14 percent to 22 trillion yen during the period as a prolonged economic slump and deepening deflation continue to add to the problem.

As expected the Bank of Canada lowered its policymaking interest rate by 50 basis points to 2.25 percent. The Bank has cut interest rates by 350 basis points this year. The Bank cited slowing economic growth and excess productive capacity as reasons for the cut. The Canadian economy is vulnerable to downturns in its primary trading partner, the United States. Its problems were made more severe by the September 11 terrorist attacks. The very active cross border economy ground to a standstill in its aftermath and stricter border crossing rules have slowed down the flow of what had been normal everyday commerce.

Introduction   •   Global Stock Market Indexes   •   Recap of Global Markets   •   Currencies   •  Indicator Scoreboard

The Bottom Line   •   Looking Ahead