G-7 Seeks Signs Good Times in U.S. Will Last

TOKYO â€”  The Group of 7 finance ministers, long used to a diet of Asian crisis, Latin meltdown and Russian chaos, are facing a much different problem at their Tokyo meeting today: what to do with a U.S. economy and stock market that won’t say uncle.

It’s not that the world’s top financiers have anything against success. Rather, they fear that the economic health of the globe may be far too dependent on a handful of overvalued U.S. dot-com stocks. Their concern: A sudden reversal of fortune on Wall Street could pare American trips to the mall, leading to a sharp contraction heard around the world.

“You’re seeing a swing away from worrying about the laggards to worrying about the leader,� said Chris Calderwood, chief economist with Jardine Fleming Securities (Asia) Ltd. “The other six want to hear from the horse’s mouth that the U.S. isn’t going to blow it.�

Other nettlesome issues facing the finance ministers from the U.S., Canada, Japan, Britain, France, Germany and Italy include the rising value of the Japanese yen and strains within the European Union over interest rates.

But with the overall global economy looking better than it has in years, today’s session is unlikely to produce any dire warnings or dramatic prescriptions. The G-7 ministers don’t want to create a self-fulfilling prophecy for the all-important U.S. economy, despite their lingering concerns.

“They have to be really careful about what they say,� said Craig Chudler, strategist with Nikko Salomon Smith Barney Japan. “It could really shake the confidence of investors.�

The fears overseas about the U.S. economy are similar to those voiced repeatedly by Federal Reserve System Chairman Alan Greenspan: that stock prices are unrealistically high and that a big run-up in inflation is inevitable.

That combination could quickly slam the brakes on the U.S. economy, which would in turn shrink the world’s biggest market for exporters in Europe and Asia and threaten those regions.

Granted, the United States’ “Cinderella economy� has made fools of the worrywarts repeatedly throughout the past decade--and during periods of far greater global uncertainty at that. And many economists now grudgingly concede that new technology and higher U.S. productivity might be bending the old economic rules.

But warning signs continue to add up as American labor shortages worsen, world oil prices surge and long-term U.S. interest rates spike.

“I think the rules have changed a bit. But at the end of the day, the laws of supply and demand still apply,� said Russell Jones, chief economist with Lehman Bros. Japan. “There are some real imbalances in the U.S. economy.�

It’s a given at G-7 meetings that other regions’ problems always look worse than those at home, and U.S. officials are expected to downplay the risks. Still, what some Americans call a “new paradigm� looks increasingly like speculative froth from abroad.

“You begin to wonder if we’re all living in a fairyland,� said Chris Nailer, a Singapore-based economist with the Economist Intelligence Unit, a business information firm.

As a result, European and Japanese leaders will want reassurance that nearly a decade of U.S. magic has been the consequence of conscious policy. And they’ll want to hear about U.S. contingency plans if there is a sharp correction.

Even if everyone at the table agrees that the U.S. economy is flying on helium, however, it’s not clear what anyone could do about it or where the greatest danger might lie.

“Modern bubbles have always been burst by higher interest rates,� said John Shepperd, London-based global markets economist with the Dresdner Kleinwort Benson investment firm. “Still, what’s the pin that pricks the bubble--the Internet sector, rising rates, some external shock? It’s not obvious.�

The Federal Reserve is expected to raise U.S. interest rates again at its Feb. 2 meeting in a bid to preempt trouble, with further hikes to follow. Still, the Fed has the difficult task of lowering expectations without creating a rout.

Analysts expect the yen’s rising value against the dollar to be a second key item on the G-7’s agenda. Don’t expect results, though.

Japan desperately wants some coordinated help from Europe and the U.S. to drive down the yen for domestic political reasons. But the Americans believe that Japan still needs to raise its growth targets and restructure its financial system.

That was Treasury Secretary Lawrence Summers’ message here Friday in a meeting with Japanese Prime Minister Keizo Obuchi, officials said.

Summers is not about to drive down the yen--a move that would probably worsen the U.S. trade deficit with Japan--during an election year. Nor would Europe, for its own internal structural reasons, welcome any step that might raise the value of the euro, the single currency adopted by 11 EU nations.

The best scenario right now is for Europe and Japan to recover convincingly as the U.S. economy gradually winds down, creating a relatively seamless transition.

Rather than concentrate on slowing U.S. economic growth, however, Summers will almost surely call on Europe and Japan to pick up more of the load.

While Japan’s outlook has improved, it’s still the laggard among industrialized nations.

Europe is expected to come in for some of the same pro-growth, pro-reform nudging. But its economy is better off, so the pressure will probably be lower.

On other fronts, the ministers are expected to touch on the thorny issue of European interest rates. With the European Monetary Union now a year old, strains are starting to show. Individual national economies are grappling with very different growth rates and inflation, yet the group is now subject to unified policies.

The European Central Bank boosted interest rates half a percentage point in November, while the Bank of England, which operates outside the euro zone, raised rates by a quarter-point. The European Central Bank is expected to further raise rates as it tries to balance Germany at the bottom of its business cycle against Spain and others near the top.

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Hisako Ueno in The Times’ Tokyo Bureau contributed to this report.