The Pain Of Reinvention

By FRANK GIBNEY JR.

As it streaked home to Washington last week, Air Force One cast a long, lonely shadow over Japan. Yet its presidential passengers managed nary a wave. In fact, Japan was about the only country that was not graced by an encouraging word from Bill Clinton or his top aides as they wrapped up their China extravaganza. Instead, while Beijing's mistakes are all but forgiven these days, Tokyo is regarded as the regional deadbeat. Treasury Secretary Robert Rubin, who pronounced China "an island of stability" in Asia's economic crisis, reminded people in Malaysia, Thailand and South Korea that he was "deeply, deeply" concerned about the value of the yen. Other officials were tossing off background critiques of Japan (whose Finance Minister, Hikaru Matsunaga, has been referred to as Minister for the Destruction of the World Economy) and warning that if its leaders didn't take "decisive action" fast, the world's second largest economy might drag the rest of Asia--if not the world--further into recession.

Here in Tokyo, the threats and lectures are getting stale. Japan's leaders bristle at suggestions that they are still wallowing in a gigantic pool of bad bank loans and stagnant economic numbers. They point to a plethora of rescue plans and billions of dollars earmarked to jolt the economy awake. Granted, nothing seems to have worked yet. But the U.S. intervention to bolster the value of the yen last month and a stream of editorials decrying Japan's lack of resolve have spurred Tokyo to further action. Just last week, Prime Minister Ryutaro Hashimoto announced the establishment of a national bank to enable Japan to close insolvent banks while protecting their honest borrowers. He later said he would support a permanent tax cut.

So why, if the Japanese have announced all these plans, is their economy still dead in the water? The truth is that the sheer depth of Japan's crisis is beyond a simple menu of decisive action. Although some Tokyo policymakers may recognize that, much of the country is in denial. That's understandable, since the Japanese still enjoy one of the world's highest per-capita incomes. Moreover, this is an economy that since the 1980s has been heralded as a global model of success. This is the very system that allowed Japan to climb to greatness out of the ruins of World War II. It was supposed to be fail-safe. And now it has to be scrapped? Not easy.

For one thing, Japan's has never been a culture that made it easy to admit defeat. This year, in despair over malfeasance investigations and bankruptcies, more than a dozen prominent bureaucrats and businessmen have committed suicide. More important, the changes being discussed go far beyond dropping lifetime employment and closing the doors on a bunch of banks. Critics are calling for a complete overhaul of the much celebrated education system and drastic new environmental regulations, not to mention a reassessment of how Japan will deal with its biggest future headache: the world's most rapidly aging society.

The process might move faster if it was clear who was running Japan. But after a century of iron-fisted control over the economy, Japan's vaunted bureaucrats have been unseated by allegations of corruption and mismanagement. Politicians have moved into the power vacuum, but their strengths are in vote getting, not policymaking. A legislative committee is now in charge of shaping plans to reform Japan's banking system, for instance. But Japanese politicians do not have big budgets for experienced staff. Even if they could plead for help from the bureaucrats, that might not be wise. Consider the diplomat who was reassigned to Tokyo this year to direct one ministry's derivatives operations: he confessed to an economist friend in Washington before he left that he didn't have a clue how derivatives worked. As former Prime Minister Kiichi Miyazawa concluded last winter, "I fear we may not be quite ready for globalization."

That goes for the whole country. Analysts predict that if the ruling Liberal Democratic Party does well in this weekend's parliamentary election, Hashimoto may win the clout he needs to push for controversial reform. Yet voter turnout is expected to be low, mainly because the public is disgusted with the political system. Moreover, an L.D.P. victory would depend on traditional supporters like farmers and construction workers, who are against reform because it would threaten their contracts and subsidies.

Alas, that is not so different from the conundrum facing the government's newly announced bank-rescue agency. The announcement prompted a rare surge in the stock market last week because it indicated a willingness to let insolvent banks fail. The problem is that bureaucrats are already arguing over which banks should be allowed to go and which should be propped up. That sort of dispute speaks volumes about why the country seems to be dithering while the world screams for action. As last week's measures demonstrate, outside pressure still gets results when Japan senses it needs to act. It could take a generation to engineer the sweeping change Japan requires. And Washington must be careful not to isolate Japan while it struggles to change.