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Chiangmai, Thailand Sep 8-12.


(07/17/1998 - Prestowitz) Prescription For Japan

Prescription For Japan
Clyde Prestowitz
963 words
17 July 1998
The Washington Post
Copyright 1998, The Washington Post Co. All Rights Reserved

To the amazement of everyone possibly including itself, the long-neglected and downtrodden Japanese electorate sent a loud, unexpected demand for change to its political leaders Sunday by handing the ruling Liberal Democratic Party (LDP) a resounding defeat in elections for the upper house of the Diet.

The message could not have come at a more crucial moment. With the continuing Asian economic crisis pushing hundreds of millions of people around the Pacific back into poverty, Asia and much of the rest of the world are teetering on the brink of a kind of calamity not seen since 1930. Comprising more than two-thirds of total Asian GDP, Japan could be an engine of growth along with the United States to help pull Asia away from the edge. Over the past several years, however, stagnation and policy dithering in Japan have only exacerbated the problem.

Staggering under a mountain of bad loans, Japanese banks have cut their lending to the rest of Asia, while Japanese importers have reduced their buying. At the same time, a steadily weakening Japanese yen has made Korean, Taiwanese and other Asian exports less competitive in world markets and nearly triggered a potentially disastrous Chinese devaluation just before President Clinton's trip to Beijing. Joint U.S.-Japanese intervention in the foreign exchange markets to support the yen stopped its slideand bought a "window of opportunity" for introduction of new measures to revitalize Japan, and through it the rest of Asia. Now the question is whether Japanese leaders will heed their public and act boldly before the window shuts and a further slide of the yen triggers a total meltdown in Asia and possibly the rest of the world.

While the decision of Japan's voters is a welcome change, it ironically creates uncertainty and the possibility of delay of important reforms as the LDP vacillates in choosing a new leader. Therefore, it is important that the United States and other countries move quickly to reinforce and elaborate the message of the Japanese electorate. As soon as a new Japanese leader is chosen to replace departing Prime Minister Hashimoto, President Clinton should invite him for a quick holiday consultation in Hawaii. The administration should reiterate that Japan must urgently take immediate, bold steps to restore the health of its banking system, to stimulate its economy by regenerating consumer spending and to discourage further devaluation of the yen.

For the past several years, Japan's sick banks have been strangling the economy by cutting back on lending in an effort to repair their balance sheets and maintain capital adequacy. Recently announced plans for a government orchestrated "Total Plan" to take over and dispose of bad loans and possibly close insolvent banks while maintaining lending to creditworthy borrowers have been greeted with skepticism, because the criteria for separating the good from the bad were vague while the announced two tofive year time frame seemed entirely too long. In short, it looked too much like the same old thing.

To prove they mean business, Japanese leaders must spell out the criteria to be used in judging which banks should be closed, and they must aim to complete the cleanup in six months. They also must pass legislation to ensure that Japanese depositors are guaranteed against loss.

To stimulate the economy, Japanese leaders have focused strongly on increased public works spending. Although generally rife with corruption and inefficiencies, such spending may be helpful in current circumstances and should be carried through as quickly as possible. It does not, however, address the problem of the extremely low level of consumer spending, which is a striking aspect of the current Japanese malaise. Although there has been talk of an income tax cut as a possible remedy, such a reduction would have only a limited effect, because the vast majority of Japanese currently pay little or no income tax. What is really needed is a revamping of the tax system away from the taxation of consumption.

In addition to possible income tax cuts, the United States should urge Japan to consider quick abolition of its consumption tax along with revision of land-use restrictions and the introduction of mortgage-interest deductibility to stimulate buying of new homes and accompanying appliances and furnishings. Other incentives such as government-issued coupons for rebates on big-ticket items also could be considered. While all this is aimed at jump-starting the Japanese economy, long-term health can be regained only by thorough deregulation and decartelization of Japan's business structure. Concrete steps to achieve such reform must be spelled out now.

Weakening of the yen arises partly from bearish expectations and partly from the fact that Japanese savers and investors can earn far more abroad than the half-percent interest now being paid in Japan. With any luck, the above measures will ameliorate further downward pressure, on the yen but the United States should agree to consider further joint exchange market intervention while reform takes effect. Japan also could pursue voluntary restraint of exports that compete with those of other Asian countries to prevent further pressures on them.

Finally, the president and the new prime minister should call for an immediate extraordinary meeting of leaders of the Asia Pacific Economic Cooperation forum (APEC) to launch development of an Asian recovery plan that could be announced at the fall APEC leaders' meeting. Such a meeting should include the IMF and the World Bank and should focus on methods of providing greater stimulus to APEC's hard-hit economies. Fifty years ago, the Marshall Plan was developed to save collapsing Europe. Now something equally as bold is needed to rescue Asia.

The writer is president of the Economic Strategy Institute.


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