Greenspan Plays Down Japan Stock Dive : * Economy: The chairman of the Federal Reserve says Tokyo’s dramatic decline should have only a limited effect on the United States.

WASHINGTON — Federal Reserve Board Chairman Alan Greenspan predicted Friday that plunging stock prices in Japan will have no more than a “limited” effect on the United States, but he pledged that the Fed will watch the situation closely in case the spillover is more severe.

Testifying with Securities and Exchange Commission Chairman Richard Breeden before the Senate Banking Committee, Greenspan also said he is dissatisfied with the pace of the economic recovery.

Both officials played down fears that the dramatic decline in the Tokyo stock market--where stock prices have fallen by about 30% over the last six months--will hurt the U.S. economy.

Some analysts have speculated that Japanese banks, which make 16% of the commercial and industrial loans in the United States and 35% in California, will cut back on the funding they make available. They also have raised the possibility that Japanese investors will take their money out of U.S. stocks, real estate and government securities.

“These fears, while understandable, seem to me exaggerated,” Greenspan said.

Greenspan and Breeden noted that the Japanese decline comes in the wake of vast inflation in both the Japanese real estate and stock markets. “In my judgment, the impact on the United States from Japanese stock price changes to date are likely to be limited,” Greenspan said.

Breeden also noted that past movements of the Japanese markets have had little effect on stocks in the United States, where the Dow Jones industrial average reached record levels this week.

Typically, a 10% decline in Japan has been correlated with only a 1.4% reduction in U.S. stocks, he said.

“And there are many, many other factors that affect our market, including interest rates, projections of corporate earnings, expectations about the U.S. economy that undoubtedly have a far greater impact on changes in the value of the U.S. market than changes in the Nikkei” index, Breeden added.

While the two countries have the world’s largest stock markets, he said, they are dramatically different. Only 2,300 companies have publicly traded stock in Japan, contrasted with 16,000 in the United States.

Greenspan said it appears that the U.S. economy expanded by 2% in the first quarter, and he added: “I think that does not bring down the unemployment rate at a pace at which I think we would like to see.”

However, he said the Fed expects growth to accelerate later this year.