AS 1991 heads toward the homestretch, the big question mark in the world economy is Japan. The current expansion in Japan began in November 1986. Most analysts believe the Japanese will avoid outright recession. However, the risk of a downturn is rising. A deep decline is unlikely, but if one developed, that would cast a dark shadow over global prospects.The Bank of Japan imposed a tight clamp on Japan's money supply more than a year ago. The annual growth rate of the key money measure plummeted from more than 13 percent in mid-1990 to about 3.5 percent currently. According to John Greenwood, publisher of the Asian Monetary Monitor, a leading economic journal, this "abrupt monetary slowdown was more severe than any in the postwar period." On July 1, the Bank of Japan reversed itself and cut its discount rate to 5.5 percent from 6 percent, a clear signal of relaxation. Further cuts are probable. This experiment in go-stop-go policy was out of character for the bank, which had an enviable reputation for stable policy. Unfortunately, the Bank of Japan's action came too late to prevent a slowdown, if not a recession. As a result of the money squeeze, telltale signs of a slump in Japan are now visible. Columbia University's business cycle research center says that "growth rates of the leading indexes of most major market economies have now picked up.... The major exception to this trend was Japan, where the leading index has continued to languish." Manufacturing output has started to drop. Sales have gone down even more. Consequently, the ratio of inventories to sales is up substantially among producers of machine tools and other general industrial machinery. Key observers in Tokyo say this pattern will likely be a harbinger of further cutbacks in production. Corporate cash flow and liquidity are under pressure. The ratio of cash flow (retained earnings plus depreciation) to sales is down. The director of research at a major Tokyo investment firm says this means that Japanese firms are likely to pare their plans for capital investment. The scandals that have rocked financial markets in Tokyo have also shaken confidence in the stability of Japan's role in world capital markets. Japanese investors, who were on a global buying spree for the past decade, are now trying to keep their resources at home. One of Tokyo's most knowledgeable forecasters expects Japanese investors to repatriate roughly $50 billion in long-term capital during 1991 and 1992. By contrast, Japan's outflows of long-term capital averaged almost $90 billion a year in 1988, 1989, and 1990. Mr. Greenwood believes that it has taken an unusually long time for the Bank of Japan's tight money policy to slow activity. The economy was "very buoy-ant," he said, "and there was ample liquidity.... Thus, the impact of slower monetary growth took longer to show through." Recent events in Japan have close parallels in the United States. The Federal Reserve System flooded the US economy with unwanted cash in 1985 and 1986. These actions kept the US expansion alive, but they also led to an enormous number of bad loans. As in Japan, the Fed ended the money flood abruptly. This resulted in the stock market meltdown in October 1987. However, there was so much liquidity in the economy that business kept on rolling until July 1990. Subsequently, the Fed waited until long after the US recession started before cutting rates. Now, the Fed is reflating, albeit cautiously. The Japanese have had analogous experiences. When the Bank of Japan tightened up, the Tokyo market crashed. Time will tell whether Japan will also have to deal with a massive overhang of bad debts. To its credit, the Fed seems to have learned from its roller-coaster performance. From the day he took office four years ago, Fed chairman Alan Greenspan has tried to end the central bank's dreary cycle of stop-and-go money policy. Mr. Greenspan's tactic was a sharp, once-and-for-all reduction in money growth. Whether this will ultimately succeed is an open question. However, no one can doubt Greenspan's determination to move toward stable prices. The Bank of Japan should watch carefully. There are lessons to be learned.