Japan's finance minister warns of 'consequences' of US debt default

Japanese Finance Minister Taro Aso urged the United States to resolve a budget gridlock in Washington that triggered a government shutdown, warning of grim "consequences" for the global economy on Friday, Oct 4, 2013. -- FILE PHOTO: AFP
Japanese Finance Minister Taro Aso urged the United States to resolve a budget gridlock in Washington that triggered a government shutdown, warning of grim "consequences" for the global economy on Friday, Oct 4, 2013. -- FILE PHOTO: AFP

TOKYO (AFP) - Japanese Finance Minister Taro Aso on Friday urged the United States to resolve a budget gridlock in Washington that triggered a government shutdown, warning of grim "consequences" for the global economy.

The present impasse, where the refusal of a right-wing rump of the Republican Party in Congress to pass a budget bill has resulted in the first shutdown in 17 years, is already affecting the currency markets, Mr Aso said, warning it could worsen.

"I think this could likely result in a situation where the dollar will be sold and the yen will be bought," he told reporters.

The yen has already soared to multi-month highs against the dollar, as traders move out of the greenback and into the safe haven of the Japanese currency.

The falling dollar is bad news for Japan's exporters, a key driver of growth in the world's third-largest economy, because it erodes their repatriated profits.

But, "my feeling is... the debt limit will have an internationally significant impact," Mr Aso said, referring to a looming October 17 deadline by which the US government needs lawmakers to raise the ceiling on the amount of money it can borrow.

"Unless it is resolved swiftly, we will see various consequences." Japan is a major holder of US government debt.

Mr Aso's comments came as US President Barack Obama cancelled his tour to key summits in Asia to stay at home and deal with the crisis.

Mr Obama is locked in a bitter fight with the Republican-controlled Congress, where lawmakers have linked passage of the budget bill to a delay in the implementation of "Obamacare", a law that requires all Americans to have health insurance.

The impasse has led to the shuttering of government offices across the country, with so-called "non-essential" staff told to stay at home, with observers warning of a knock-on effect to the economy.

The US Treasury has warned of a disastrous outcome if Congress's refusal to move on the budget becomes a refusal to raise the country's borrowing ceiling.

That could lead it to default on its bonds, which are held by governments around the world and, as traditionally the most liquid asset, are the backbone of the global financial system.

It said if the country's borrowing power is not increased by October 17 it will run out of cash to pay the nation's bills and could return the US to a recession as deep as that of 2008-2009 in the wake of the Lehman shock.