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Archive for Friday, June 29, 2001

Japan’s economy still sinking

June 29, 2001

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— The Japanese require politicians to be hardened optimists. Even prime ministers wield little real power in the office, which they are expected to give up after two to four years. To aspire to be a meaningful No. 1-san is to choose hope over history.

Japan's defeat in World War II soured the Japanese on political leadership strong enough to drag them into military disaster. They have granted their postwar leaders unlimited power only to spend money to reward voters. And that has now helped produce a financial disaster that is rapidly moving up Washington's list of urgent problems.

Recently, Japan's leaders have chosen to sell optimism as well as harbor it. They have sought to persuade their own people and the rest of the world that recovery is just around the corner, and painful sacrifice can be postponed or avoided.

A "divine wind" would soon blow prosperity back to Japan, then-Prime Minister Yoshiro Mori characteristically assured me last September.

Instead, Mori was blown away by his own political failings and by the renewed faltering of the world's second-largest economy. Today, Japan is the land of the sinking hope, as falling industrial output tips the island nation toward its fourth recession of the past decade.

Mori's successor, Junichiro Koizumi, visits President Bush at Camp David this weekend for a meeting that may rank low in visibility but will be high in importance for Bush's efforts to revive an unresponsive U.S. economy.

Bush and his aides have abandoned the public hectoring of Japan practiced by the Clinton administration. But the new low profile does not mean that U.S. officials are any less concerned about Japan's continuing inability to deal with the most serious deflation an industrial country has experienced since the Great Depression.

On the contrary. A decade of delay has convinced many in official Washington that only a full-blown crisis will empower a Japanese leader to take the painful steps needed to clear away the mountains of bad loans and busted real estate deals that are suffocating the larger economy.

Government debt, fueled by a decade of stimulus packages that failed to unlock consumer spending, stands at 130 percent of gross national product. The public knows that neither insurance companies nor the government have the resources to pay for pensions and other contractual benefits. The Japanese do not part with their yen lightly. They hope, but they verify.

Japan's immediate problems center on a rotting banking system, which carries hundreds of billions of dollars of non-performing loans on its books. Calling or writing off those loans would trigger a massive wave of bankruptcies and factory closings. Instead of creeping higher, as it now does, unemployment would rocket upward.

But the bad loans and real estate losses are sucking oxygen out of the Japanese financial system. Even with interest rates at zero, banks cannot lend money to companies that have no prospect of paying it back. This liquidity trap makes growth impossible. If a crisis is what is needed, the Japanese seem to be moving steadily toward it.

Better to deal with the problems of a failing banking system before a world-rattling crisis erupts than after, when the United States would be less able to help. That is how Japanese political party leaders understood the coordinated message they received from Federal Reserve Chairman Alan Greenspan, White House chief economic adviser Lawrence Lindsey, Treasury Secretary Paul O'Neill and other U.S. policy-makers during an unusual day of briefings here on June 1. Koizumi will hear the same.

The new prime minister will arrive at Camp David floating on sky-high public approval ratings generated by his fresh outlook and promises of reform and rejuvenation. Bush will probe Koizumi's willingness to expend this rare political capital after July elections to the Diet's upper house.

Koizumi paved the way last week for the meeting by unveiling a "plan of sacrifice" that promises to curb spending and deal with bad loans. But the president must measure that against past false optimism and relying on divine winds. Europe's slowdown and America's uncertain economic outlook make the international economy suddenly fragile to a Japanese collapse.

Hope is fine. But it easily becomes a substitute for action. Bush and Koizumi may want at their June 30 meeting to consider the words of Prince William, the founder of the House of Orange: "It is not necessary to hope in order to act, or to succeed in order to persevere." Or, as an American politician would put it, when in a hole, stop digging.

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