TOKYO -- Many of the forces driving world financial markets down since Iraq seized Kuwait Aug. 2 will outlive the current military confrontation, some senior bankers and economists here say.
The analysts acknowledge that the Persian Gulf crisis has magnified existing problems and added new ones -- especially six weeks of gyrating oil prices -- and that world stock prices seem seriously overdiscounted.
But they say that the underlying factors were already visible before Iraqi tanks rolled into Kuwait and that they will still seriously limit any recovery of financial markets after the crisis is over. The gulf confrontation itself can only make things worse, the analysts say, though how much worse will depend on how it ends.
"At present, the United States Federal Reserve Board has very few options to deal with its dilemma," Nobuyuki Ueda, associate general manager of the economics department at Long-Term Credit Bank of Japan, said in a talk to the Foreign Correspondents' Club of Japan Friday.
Mr. Ueda and other bankers and economists in Japan point to:
*Rising interest rates in Japan.
To fight off mounting inflationary pressures, Japan has more than doubled its central bank rates, from 2.5 percent to 6 percent in a year and a half, which has made U.S. government bonds and other dollar-denominated investments far less attractive than they were a year ago.
In the process, it has helped to accelerate this summer's plunge of the dollar from about 156 yen to about 136 in less than three months, and has severely limited how far the Fed can reduce U.S. interest rates if it needs to fight a recession.
The Japanese move also could limit the ability of Japan's stock markets to recover from the effects of the gulf crisis.
*Persistent sluggishness in the U.S. economy.
SG Given Japan's newly increased interest rates, the gyrations of oil
prices and the prospect that the Mideast crisis might keep them high beyond the end of this year, Mr. Ueda and other Japanese bankers and economists advise against any early attempt to stimulate the U.S. economy by easing interest rates.
"Demands to ease American interest rates to stimulate the economy are quite inappropriate at the present time," Mr. Ueda said. With or without a prolonged oil shock, the U.S. budget deficit must be brought under control before U.S. interest rates can safely be reduced, he and others in Japan argue.
*Uncertainty about oil prices.
Mr. Ueda listed three possible outcomes for the Mideast crisis. All lead to oil prices higher than they were before Aug. 2, and they differ only in their answers to the question: How much higher?
A quick diplomatic resolution would leave oil at about $21 a barrel, about $4 above the pre-crisis level of $17, Mr. Ueda said. A prolonged confrontation could keep oil at $25-$30 for the duration, he said, and war could send prices to $40 or even $50, with excruciating economic effects.
Mr. Ueda considers prolonged confrontation, with oil at $25 or $30 a barrel for the duration, most likely, giving it a 60 percent chance and each of the other possibilities a 20 percent chance.
In the United States, and to a lesser extent in Europe, any of the three outcomes could be expected to limit any recovery of stock prices after the crisis, Japanese analysts say.
Japan's economy is better positioned than those of most industrial countries to ride out any of the three outcomes, but that does not mean its financial markets will regain their former vigor as soon as the crisis ends, Mr. Ueda and other Japanese economists say.
That is because there is a consensus in Japan that Japan is going to fight harder against oil-fired inflation this time than it did in the Mideast crises of the 1970s.
"A central banker will choose to fight inflation any time he has that choice," Yasushi Mieno, who is Tokyo's chief central banker as governor of the Bank of Japan, said at the Foreign Correspondents Club Tuesday.