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Abe warns G7 leaders on risk of Lehman-scale crisis

May 26 2016 11:29
Isabel Reynolds and Maiko Takahashi

Japanese Prime Minister Shinzo Abe answers questions during a short press interview at his official residence in Tokyo (Kazuhiro Nogi, AFP)

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Tokyo - Japanese Prime Minister Shinzo Abe presented documents to his fellow Group of Seven leaders on Thursday that he said indicated a risk of the world economy falling into a crisis on the scale of the 2008 Lehman shock, if appropriate policy measures weren’t taken.

Abe presented documents showing that commodity prices had fallen by 55% between 2014 and January 2016, similar to the margin by which they fell in 2008-2009, among other data. The presentation at the summit in Mie Prefecture in central Japan could play into domestic economic policy, as Abe has frequently said that he would proceed with a planned increase in the sales tax in April 2017 unless there is an event on the scale of the Lehman shock or a major earthquake.

Still, Abe also has convened economic advisory panels where calls for a delay were aired. The narrative among a number of Abe advisers and Japan economists for months has been that the prime minister would use his leadership of the G7 this year to help shape a decision to put off the boost in sales tax, which led to a recession when it was raised in 2014.

“Abe is indicating a postponement of a sales tax hike by using the word Lehman,” said Kyohei Morita, chief Japan economist at Barclays. “He is using the meeting to convey his concerns on Japan’s economy to Japanese households.”

Deputy Chief Cabinet Secretary Hiroshige Seko cited Abe as telling his fellow leaders that he was not pessimistic about the world economy, but that the G7 must not turn their eyes away from the risks. If the policy response is wrong, leaders must be aware that there is a risk the world economy will fall into a crisis beyond the usual economic cycle, Seko quoted Abe as saying.

‘Extremely difficult’

“Many leaders saw the situation in emerging economies as extremely difficult,” Seko said. “On the other hand, there was some doubt about Prime Minister Abe’s reference to a high risk of a crisis.”

Seko said there was no discussion of the sales tax increase during the G7 meetings.

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