US to Lecture Tokyo on Helping Asia
Japan must revive economy to stimulate Asia, US officials plan to tell Tokyo within days. But the pressure is welcome.
WASHINGTON — The US and Japan - the world's two largest economies - are putting their heads together to contain East Asia's six-month-old financial crisis, but American officials are demanding that Tokyo do more to rescue its neighbors.
A team of top Clinton administration aides, now on a damage-control tour of Asian capitals, plans to urge Japan to take much bolder steps than it has so far to revive its vast economy and help reverse the collapse in regional stock markets, according to a US official here who requested anonymity.
Both governments want to prevent the crisis from spreading further and severely affecting their own economies, but Japan has exasperated US officials by repeatedly rejecting earlier calls for decisive action. Despite rising market chaos, it has tried to stimulate its economy through efforts that US officials privately criticize as "too little, too late."
At the same time, foreign pressure is often a necessary ingredient in the decisionmaking process of the Japanese government. "Japan is, in a way, waiting for the US to come [and apply] some pressure," says a senior Finance Ministry official in Tokyo. "In order to get the understanding of the Japanese public, the Japanese government also has to have the US in the scheme."
A delegation of officials from the National Security Council and Departments of Treasury and State will visit Tokyo within days in the final stop of a US campaign that began Sunday in Singapore.
The mission is led by Deputy Treasury Secretary Lawrence Summers, the US official who has led the American response to the Asia financial crisis. The group could meet with Japanese officials as early as this weekend, says the high-level US source.
"The point is to give the Japanese from the horse's mouth a sense for what is happening across the region," says this source.
"They need to have it impressed on them very clearly that they have to act, but the danger is that with markets moving so fast they will be behind the curve again when they act and it will again be too little, too late," according to the source.
US officials believe Japan, the world's second-largest economy, has failed to meet its responsibilities as an unwitting instigator - and would-be fixer - of the regional crisis.
This view has some support within Japan.
"While every business executive is hoping for more drastic economic measures, Japanese government officials and politicians all seem so spineless," says a retired government official, now with a major Japanese corporation, who also demanded anonymity. "They have no guts and power. They are stuck in the mud, not knowing what to do."
US pressure welcomed
Observers in Tokyo say the US government can capitalize on this frustration to push Japanese leaders.
"The US has a powerful partner on its side, the Japanese public," says Susumu Takahashi, chief economist at the corporate-funded Japan Research Institute Ltd. in Tokyo.
The problem is that the government, and particularly members of the ruling Liberal Democratic Party (LDP), believe that some mild tax cuts and economic stimulus proposals announced recently are adequate for the moment.
"LDP officials are still waiting for some kind of reaction from the market because they are pretty sure that they've done enough," concludes Mr. Takahashi. "They've got something to say [to US officials] about what they have done for the financial crisis in Japan but not much about economic stimulus measures.
"Japanese officials don't have enough awareness of how important Japan's economy is to the rest of Asia."
The country's moribund economy has staggered this decade under the weight of bad bank loans that by official estimates now total $575 billion. Tokyo until recently had avoided a costly public bailout of troubled banks for fear of angering voters. Also, the austerity-minded leadership had rejected budget-busting tax cuts.
As a result, the depressed economies of East Asia sorely miss an economically healthy Japan, the region's biggest market and source of capital.
"Publicly, US officials talk nicely about Japan but in private they are very exasperated and vitriolic toward how Japan has been so slow in solving its problems," says Clyde Prestowitz, president of the Economics Strategy Institute in Washington and a former US trade negotiator.
"In private you hear scathing comments from US officials and experts that Japan has manufactured a recession - a government-created policy disaster," says I.M. "Mac" Destler at the Institute for International Economics in Washington.
US-Japan relations are not as tense as they have been in past decades over trade and strategic matters. Still, the stakes in Japan's attempted turnaround are huge.
Treasury officials have warned Tokyo that if it fails to spur the economy and shake up the banking sector, it might touch off a crash in world equity prices and a global economic slump.
Of special concern is the possibility a further fall in the Tokyo stock market will induce Japanese investors to sell foreign investments like US equities and Treasury bonds and repatriate their capital.
"Southeast Asia is a passing issue but Japan is the one situation in Asia that threatens to grow as a problem for the world economy - it is the leading problem," says Carl Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y.
Tokyo helped provoke and worsen the market mayhem by allowing the yen to fall from 90 against the dollar in the first half of 1995 to 132 now.
The weak yen has put strong downward pressure on the currencies of East Asian countries that rely heavily on exports to the Japanese market and on successfully competing against Japanese goods elsewhere. Tokyo last month reversed itself and announced a $227 billion effort in bank restructuring.
It also proposed a $15 billion stimulus package of tax cuts, a figure close to what US officials had earlier recommended, says the US source.
Japan's slow politics
But by the time leading factions of the highly fragmented Liberal Democratic Party endorsed the measure, market confidence had fallen to a point where more tax cuts were needed, the source says.
The ruling party's factions have put internal squabbling before concerns of economic vitality at home and financial stability worldwide, say analysts.
The US-Japan tensions underscore how new technology and lower barriers to capital have freed up huge financial flows that run circles around decision-makers in a heavily bureaucratic, consensus-oriented government such as that in Japan, analysts say.
"One of the dangers is that an insular, faction-ridden, and in some sense traumatized political system finds it very difficult to match the frantic pace of global markets," says the source.
"In the US Treasury there is a deeply, deeply ingrained skepticism at the ability of Japan's system to adjust, to move in a decisive fashion," according to the source.
So far, Treasury officials have refrained from publicly criticizing Tokyo, seeking to privately coax Japan toward fiscal stimulus and banking sector reform. They have relied on violent market downturns to repeatedly vindicate their warnings.
But now, as Tokyo continues to overlook blunter signals from Washington and the markets, US officials might consider going public with their pressure, says the official.
"We have been dissatisfied all along with what they are doing but we don't want to destabilize them," says the source.
Through public criticism, Washington would probably provoke long-standing resentment among Japanese over their lesser status in an "unequal partnership."
Still, during crises Japanese politicians sometimes rely on gaiatsu, or foreign pressure, to help break a deadlock caused by opponents to profound change.
One Tokyo-based analyst, Susumu Kato, chief economist at BZW Securities, says the US will likely advise Japan to expand its domestic market first, and then take further measures in Asia.
Such actions, he adds, might require Japan to promote loans to Indonesia, Malaysia, and Singapore. Also, the government could advise private financial companies not to withdraw their business in Southeast Asia and South Korea.
And Japanese institutions could convert their short-term loans into long-term loans for their Asian borrowers.
"The US and Japan both should commit themselves to this Asian crisis, but they don't want to overcommit themselves," says the Japanese Finance Ministry official.
"Prime Minister [Ryutaro] Hashimoto and his administration are aware that the Asian economic situation is a potential time bomb. They are just waiting for the right time to step in."
* Monitor staff writer Yoshiko Matsushita contributed to this report from Tokyo.