Japan's economic 'High Noon'

When Japanese Defense Minister Gen Nakatani recently visited Washington for talks with Donald Rumsfeld and other US defense officials, he was surprised to find his hosts focusing not on Japan's contribution to the global antiterrorism campaign but on the parlous state of his country's economy. For a moment, he is said to have thought he was at the Treasury Department, not the Pentagon.

Administration sources say that top US officials from the president on down share this concern. The fear is that unless Tokyo takes urgent action, the Japanese economy could plunge into a downward spiral, with disastrous consequences for the rest of the world, including the United States.

George Bush is reported to have got on famously with Japanese Prime Minister Junichiro Koizumi when the latter visited Washington a few months ago. In fact, Mr. Koizumi is said to be right up there with Tony Blair and Vladimir Putin on the select list of the President's best foreign friends. Bush has dubbed Koizumi "Gary Cooper," after the sheriff in "High Noon," and Koizumi has repeatedly assured the White House that when showdown time comes, he will be as fearless as his namesake.

There is not much disagreement among international economists over what such a showdown will mean. For 10 years, the Japanese economy has been ailing, and for 10 years successive governments have avoided showdowns by old-fashioned pump-priming, trotting out a succession of supplemental budgets centered on public works.

Each such effort gave a short-term boost to the economy, but never enough to bring it out of recession and onto the path of stable recovery. A strong lobby of businessmen and of politicians from the ruling Liberal Democrats wants to repeat the process yet again.

When Koizumi became prime minister, riding a wave of public enthusiasm in April 2001, he promised that he would not repeat the old story, that any solution he devised would require pain - and the public lapped up his words. But as summer turned into fall, the promised pain has not materialized in any meaningful fashion. Unemployment is up to an unprecedented 5.5 percent. Koizumi's poll ratings remain high, and in his New Year press conference Jan. 4 he stressed yet again that "there can be no economic growth without structural reform." But banks with nonperforming loans have not been forced to the wall, as happened on a massive scale in the United States in the early Reagan years. There is widespread public doubt that even so-called performing loans will turn sour once a bank tries to call them in. Companies that should have gone bankrupt years ago remain anemically in business. Who wants to invest in such a climate?

One other component of pain needs to be brought into play. Japan today remains one of the most regulated economies in the world. These regulations began in 1940, when Japan was already at war with China and soon to be plunged into war with the US as well. Under a general mobilization law, the government took over many functions that had long been left to the private sector. Japan's economy remained capitalist in form, but market forces were severely distorted by the thicket of regulations.

Incredible as it may seem, 60 years later, many of these regulations continue to choke the economy. Those who benefit from these regulations are a minority, but they are politically influential and do not want to give up their privileges.

Meanwhile, visitor after visitor to neighboring China has remarked on the extraordinary energy there. True, at the government level, the bloated public sector continues to be a huge drag on the economy as a whole. Yet it is also true that wherever a traveler goes in China these days, not only up and down the coastline or the Yangtze River, but far into what used to be considered remote hinterland, he finds private businessmen and entrepreneurs starting up factories, doing deals with each other, e-mailing suppliers and clients across the globe.

Contrasting this ferocious energy with the lassitude and unwillingness to move out of well-worn paths that seem to typify Japan these days, some analysts opine that in less than 20 years there may be only three major economic powers left in the world: the US, Europe, and China. Japan, by then, may still have a handful of world-competitive manufacturers like Toyota or Sony, but it will be a minor power, a boutique, not a mover and shaker of the global economy.

So, Gary Koizumi, how about it? How long will you wait for high noon?

Takashi Oka is a former Monitor correspondent.

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