Clyde V. Prestowitz
29 June 2001
The Washington Post
Copyright 2001, The Washington Post Co. All Rights Reserved
After the controversies of his recent European tour, President Bush's
informal Camp David meeting this weekend with Japanese Prime Minister
Junichiro Koizumi may seem a lesser event. But with the world's
second-largest economy on the verge of a meltdown that could trigger a
deep global recession, helping Japan reinvent itself is one of the most
pressing issues now confronting the administration. It is also one that
will require a shift of longstanding U.S. priorities and assumptions.
For more than 50 years, America's Japan policy has subordinated
economic issues to political-military considerations. Indeed, among the
Bush administration's first pronouncements were those reemphasizing the
primacy of Japan as America's strategic partner in Asia and playing
down the need for U.S. economic advice.
But an economically distressed Japan cannot be an effective ally, and
it increases the risk of Asian instability. Thus it is precisely
because security ties are important that the administration should make
fixing the economy its top priority in Japan.
This should be easier than in the past, because whereas previous
Japanese leaders resisted discussion of the need for economic reform,
it is Koizumi's main concern. He will be carrying a bundle of reform
proposals for which he would like U.S. support.
To respond appropriately, U.S. officials must discard the conventional
view of Japan's economy as a typical example of market capitalism. On
the basis of this assumption, many leading economists over the past
decade have urged Japan to fix its economy by using the standard
macroeconomic tools of enlarging the money supply and increasing the
government's deficit spending to jump start renewed growth. But after
years of zero interest rates and unprecedented deficit spending, all
Japan has to show for its efforts are history's largest government
debt, a further increase in nonperforming bank loans and a slide back
The standard nostrums haven't worked because Japan's is not a standard
capitalist market economy. Rather, much of it is heavily regulated,
protected, dominated by quasi-monopolies, and similar to the old Soviet
economy, in which the value of the output was less than the value of
the inputs. In such a distorted economy, deficit spending on pork
barrel projects provides little stimulus and diverts resources to
bloated and inefficient construction companies that reduce the
economy's productivity. By the same token, easy money may temporarily
increase demand, but it only causes further long-run harm if it mainly
prolongs the lives of companies that subtract value from the economy.
The fact is that for Japan to regain economic health there is no
alternative to fundamental structural reform as a precondition to
making the standard macroeconomic tools effective. This is a view held
by generations of U.S. trade negotiators, and it is now being
wholeheartedly embraced by Koizumi. At Camp David, he will present a
series of proposed measures to get rid of nonperforming bank loans in
two to three years, dismantle or privatize many government
corporations, cut government subsidies and transfer more functions from
the central to the regional governments.
In the past, U.S. officials have proposed similar measures, and there
is no reason now not to give them the fullest possible support. But it
is important for Japan to do much more in terms of deregulation,
implementation of effective antitrust policies, reform of land use
rules and provision of information to the public. In this regard, it
might be worthwhile to initiate preliminary talks on the feasibility of
a comprehensive U.S.-Japan free market agreement that would commit the
two countries not only to removal of trade barriers but also to
undertakings regarding investment, antitrust, regulatory, e-commerce
and other key economic policies.
Such a negotiation would provide a way for U.S. officials to have
continuing influence on and insight into the development of the new
Japanese economy. At the same time it would give Koizumi a powerful
tool for overcoming the opposition of vested interests to his reforms.
More important than the mechanisms and details, however, is an
unambiguous U.S. commitment to restructuring. It is important for the
administration to take a public stand. Any ambiguity will strengthen
opponents. We cannot afford to lose the unique opportunity that
political developments have presented for finally restructuring and
opening the Japanese economy. Much depends on our seizing the moment.
The writer is president of the Economic Strategy Institute and a former trade negotiator in the Reagan administration.
The Washington Post