Japan's Slow Road to Reform

In attempting to soothe Japanese Prime Minister Keizo Obuchi at their summit last week, President Clinton inadvertently made it harder, not easier, for Obuchi's Liberal-Democratic Party (LDP) and the Opposition parties to reach a vital agreement on bank reform.

Mr. Clinton put himself in the position of publicly endorsing Mr. Obuchi's claim that the opposition parties are to blame for Japan's failure to resolve its banking dilemma. He undercut the sense of urgency by saying that Obuchi could only move as fast as was "politically possible." Since then, Obuchi has used Clinton's comments as a battering ram against reformers.

Consequently, Clinton's actions make it more likely, not less, that financial turmoil in Japan and its neighbors will continue and perhaps accelerate.

The reality is that the real obstacle to solving the banking crisis is not opposition parties like the reform-minded Democratic Party. Rather, vested interests in the ruling LDP are trying to sabotage a positive agreement reached on Sept. 18. That agreement was the result of hard bargaining by responsible and serious elements within both the LDP and the opposition. Its virtue was that it ended the Obuchi administration's previous policy of throwing taxpayers money at failing banks without attaching strong conditions, such as the reduction of the $1 trillion of bad debt now weighing down the Japanese economy.

At the same time, it set the stage for responsible use of taxpayer money in the crisis, as well as the orderly liquidation of failing banks.

Ever since the agreement was reached, anti-reform factions within the LDP and the finance ministry have been undermining it. The reason is that behind the bad debt are "bad borrowers" in construction, real estate, and farming, which are major sources of LDP votes, campaign funds and under-the-table payoffs. For example, the LDP apparatchiks resist liquidation of the insolvent Long-Term Credit Bank (LTCB) because farm credit cooperatives lent lots of money to an LTCB leasing subsidiary.

If tax money is used to bail out the LTCB, it can, in turn, pay back the farm coops. But the impact of such policies is to weaken the balance sheets, stock prices, and credit ratings of all Japanese banks, while perpetuating the bad debt. In short, these politicians are sacrificing the financial stability of Japan and Asia to the narrow demands of rural constituents.

The opposition is furious about the LDP backtrack. Talks among the parties have since zig-zagged between complete stalemate and partial agreements that later come undone. The details, timing and prospects of a new agreement to "nationalize" LTCB remain highly uncertain. Any gridlock could force a snap election as a referendum. Although that might accelerate long-term political reform, in the short-term, it could send the financial markets reeling.

It seems as if Clinton - and his senior advisers - were manipulated by the press offensive launched by Tokyo on the eve of the summit. Obuchi and his aides gave several high-profile interviews arguing that the US was scapegoating Japan for the global financial turmoil. If Washington persisted, Obuchi's PR machine contended, that could produce a nationalist backlash. "Give us more time," was Tokyo's mantra.

The reality is quite different. Japan has spent so much energy denying that it is the cause of Asia's problems that it has failed to be an active part of the solution. Moreover, Tokyo's "soft landing" solution rests on the same hollow promises of an imminent economic recovery that have repeatedly failed in the past. The problem is not simply that Japan is doing "too little, too late." It is moving in the wrong direction.

Despite all this, Clinton has taken the tack of soothing ruffled feathers. Clinton compared Obuchi's battles with the opposition to his problems with congressional Republicans. "So," Clinton said, "they have to work out what is politically possible." And yet, Clinton's own Treasury Secretary, Robert Rubin, has repeatedly warned that Tokyo's dithering was throwing Asia into further tumult.

Washington has unwittingly stiffened the back of politicians who resist genuine reform. Once again, simplistic approaches have undermined those in Japan who should be natural US allies.

* Richard Katz is senior editor of the 'The Oriental Economist Report' and author of 'Japan: The System That Soured' (M.E.Sharpe, 1998).

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