The Thrill Is Gone for Japan in Trying to Lead Asia's Economy

In the early 1990s, Japan sought to portray itself as the chief goose of the East Asian gaggle - a country with the economic might to lead the world's most dynamic region. Officials in Tokyo imagined Japan flying at the front of a V-formation.

East Asia, of course, is in big trouble these days. While Japan may not be the sorriest bird in the bunch, the size of its economy magnifies the significance of its debt-laden financial industry and other problems.

It has become almost commonplace for the United States and some European countries to reprimand Japan for weak action in the face of crisis, but this weekend the rest of the East Asian geese offered the most-concerted criticism yet of their once preening mentor.

Officials of 17 governments gathered in Tokyo on Saturday for a hastily arranged discussion of Asia's enduring crisis. The group included the seven leading industrialized nations (the US, Japan, and five others) as well as 10 Asia-Pacific countries.

The latter includes countries that have been hit the hardest by the regional downturn that began a year ago: Indonesia, South Korea, and Thailand. It also includes nearly all the economies that have been seen as partial imitators of Japan's state-guided capitalism or particular beneficiaries of Japanese investment: Hong Kong, Malaysia, Singapore - as well as Indonesia, South Korea, and Thailand.

East Asia can hardly forsake this country - the role of Japanese corporations and foreign aid is too great - but Japan's claim to regional leadership is slipping.

For one thing, the US is stepping in more aggressively, intervening in currency markets to keep the yen from losing too much value and being more vocal about the need to forestall a downward spiral of financial markets.

Emergence of China

And China, by resisting the temptation to devalue its currency, a move that would make its goods more competitive with the products of the new, cheaper Asia, is becoming more influential. "An island of stability in Asia" is how Treasury Secretary Robert Rubin described China last week.

More broadly, India's detonation of nuclear devices last month also complicates regional politics. Japan is an avowedly nonnuclear nation, so it stands to look weaker now that China is no longer the only Asian nation with a declared bomb.

"I don't think Japan has any capacity to lead Asia," says Michael Mosher, a political scientist researching globalization at the Institute for Advanced Study in Princeton, N.J. Although officials and academics tried to promote Japan as the regional powerhouse several years ago, "nobody actually tried to make it happen."

In contrast to South Korea, where the political system gives President Kim Dae Jung the authority to make difficult decisions, Japan a "helpless giant," says Professor Mosher. This country is perpetually slow in reacting to crisis, perhaps because, as some experts have argued, it has a weak and fuzzy democracy in which political leaders cannot exercise true power.

Former Prime Minister Yasuhiro Nakasone, in a recent paper on Japan's "political crisis," says the country should push for a "new East Asian financial policy consultation body." The idea is a far cry from the days when Japan helped fund a World Bank study on the "East Asian miracle."

Finance and central-bank officials emerged from their Tokyo meeting with little more than fresh assurances that Japan knows it must take swift action to turnaround its shrinking economy and fix its bad banks. They praised South Korea and Thailand for reforms, thanked China for resisting a devaluation, and offered some appreciation to Japan and the US for shoring up the yen.

But they saved their sternest diplo-speak for Japan: A restructuring and revitalization of its economy and financial system is "urgently needed" and a matter of "vital importance ... to the entire world economy."

The participants claimed unity, but there where different interpretations about the focus of their efforts.

Eisuke Sakakibara, Japan's top international finance official, said "the purpose of the meeting is to show to the world and the markets that the countries of the world are united ... in resolving the problems that confront us."

Other representatives, such as Lawrence Summers, US deputy Treasury secretary, indicated that the "problems" were mainly Japan's. "It's fair to say that the international community, broadly, has concerns about the economic and financial situation in Japan," Mr. Summers said.

Other participants said the point of the session was to deliver the message to Japan that it must act quickly and take advantage of a "window of opportunity" whose length no one wanted to specify. Yesterday, however, Finance Minister Hikaru Matsunaga said in a television interview that deliberations on how to handle the bad debt would start this week. "We hope to wrap up our discussion around the middle of next month," he added.

That timing may disappoint governments and traders who have worried aloud about Japan's hobbled financial industry for many, many months, but it dovetails with national elections set for July 12. Hashimoto's ruling Liberal Democratic Party has a chance to regain its majority in the upper house of parliament in the vote, so a radical policy shift seems unlikely before the elections.

Reluctance to act

Japan is in its worst recession in decades, the downturn has caused little political heat. That is because the effects of the recession have been cushioned by an economy that has a lot of room for excess workers and because the Japanese are apathetic about their government at the moment.

And there is a high-level reluctance to shut down banks, which would require putting people out of work and forcing bankruptcy on borrowers deprived of credit. "In an Asian society it's difficult to tell weak people that they should die," says Ichita Yamamoto, an LDP member of parliament. He adds, "Perhaps I should put it more delicately," since he is speaking only of economic death.

Furthermore, he says, citing this country's huge amount of savings and other economic advantages, "If you look at the situation of Japan as a whole it's not as bad as people say."

It's unfair for East Asian countries to turn on Japan, he argues, since they too made mistakes. Referring to the geese analogy, he adds, "There is a possibility Japan can fly again. Other Asian countries do not have such strong fundamentals in their economies."