By Anne D. Picker, International Economist,Econoday
Monday, April 22, 2002

Although investors continue to be queasy about corporate earnings, international stock markets rose on the week with the exception of the Singapore Straits. Earnings continued to be mixed, but economic data in Europe and Asia, although not as strong as analysts would have liked, continued to show a bottoming out and in some cases improvement. (See indicator scoreboard below.)

As expected the Bank of Canada increased their key interest rate by 25 basis points to 2.25 percent. In its statement, the Bank emphasized stronger U.S. and Canadian growth. This is the first time in two years that the Bank has raised interest rates. The Canadian economy has bounced back more vigorously than expected from last year's slowdown. Confirmation of Canadian growth prospects came from the IMF in its semi-annual World Economic Outlook. The IMF said Canada would be the fastest growing economy in the Group of Seven, which also includes the United States, Britain, Germany, France, Italy and Japan. Besides the Bank of Canada, the Reserve Bank of Australia, the Swedish Riksbank and the Reserve Bank of New Zealand have begun to raise interest rates as their economies show signs of recovery.

Standard & Poor's Corp cut Japan's sovereign debt rating for the third time and warned policy makers that they would face another downgrade if they didn't get serious about economic reforms. Japanese policy makers did appear to take Monday's downgrade seriously, however, by vowing to push forward economic reforms. The reaction appeared to mark a break from the past, when defiant Japanese officials have dismissed downgrades by international credit-rating agencies. A lower credit rating generally increases borrowing costs for a government, as investors demand a higher risk premium to hold its debt. With outstanding Japanese government bonds now totaling roughly 140 percent of annual economic output, the government would theoretically have a harder time servicing its debt. However, because local investors own such a large portion of outstanding government bonds, rating downgrades haven't tended to push up yields as yet.

The Group of Seven met this weekend as part of the spring meeting of the International Monetary Fund. There were no surprises. The group said there were growing signs of an economic recovery, but that "downside risks" remain. They cited the recent surge in oil prices and the deepening economic crisis in Argentina as examples. The ministers and central bankers also made no explicit reference to exchange rates or currency intervention in their meeting statement, saying the usual "we will continue to monitor exchange markets closely and cooperate as needed."

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