Hormats Retuns to Planet Earth

By Andrew Morse ,

Goldman Sachs International

Vice Chairman

Robert Hormats

, the same man who spooked the U.S. Treasury market just two weeks ago by speculating that Japanese investors would stop placing their money here, sounded calm on

CNBC

tonight while assessing the impact of last night's heart-stopping slide on the

Nikkei Average

.

"A lot of the smaller and medium-sized companies, which are important to growth here, simply can't get as much (lending) as they want from the banking system in Japan," he said, referring to comparative Japanese firms.

Indeed, even though the

Bank of Japan

has maintained a yield curve steep enough to challenge Jean Claude Kily, commercial banks have had difficulty whittling down the hangover from giddy real estate speculation in the 1980s. As if to hammer the point home, 13 major Japanese banks abandoned claims totaling 749 billion yen yesterday. And that was to only one class of borrowers.

The insightful comment was in stark contrast to Hormat's remarks, reported in

The Wall Street Journal

a fortnight ago, that Japan's investment in the $5 trillion Treasury market would slow to a trickle. That, he and bond and stock traders worried, would send U.S. interest rates soaring, wrecking the party American equities have held all year.

Those musings couldn't have been further off the mark--or the timing worse. With yields at home a meager 2.33%, Japan's institutions poured more than a trillion yen ($8.8 billion) into the American market in October alone, a statistic Tokyo released a few hours before Hormats' comments hit the newsstands in New York.

But Hormats wasn't quite as cogent tonight when questioned about why the Japanese government was going ahead with plans to increase taxes and cut spending.

"Fiscal constraints aren't normally the prescribed medicine by economists in a weak economic environment," he said. "It does constrain growth."

Yes, it does. And Japan's financial mandarins, who presided over one of the most spectacular explosions of wealth the world has seen, know that too.

But they are under increasing pressure from the rest of the world to cut their deficit, which is expected to total 47% of GDP this year and top half by the turn of the century.

In fact, the

Organization for Economic Cooperation and Development

called on Japan to raise its consumption tax to 7% just today.

Still, Hormats did a good job summarizing the problems, which are too big and too complex to fit neatly into a 6-minute TV spot.

By Andrew Morse

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