Decisive Point for Japan

When its second-biggest economy is in trouble, the world had better take notice. After years of stagnation, Japan’s once widely envied economy is headed toward its worst recession since the oil shock of 1974, and international concern is properly rising.

Consumer and corporate demand has dropped to the lowest level in nearly 30 years as a weak yen has cut into buying power. Inventories are piling up, and wages and profits are down. Once hugely inflated property and share prices have plunged while debt-burdened banks that ought to be shutting their doors are being kept alive with government handouts.

Does all this matter to anyone except the Japanese? Indeed it does. If other Asian countries are to climb out of recession, they need a receptive Japanese market for their exports. If they can’t sell in Japan they will try to sell even more in the United States. That threatens to bloat the U.S. trade deficit, fuel protectionist inclinations and weaken the profits of American companies.

Japan’s woes have more to do with political shortsightedness and fiscal timidity than with the basic soundness of its economy. It remains a rich country, with an economy twice the size of all the rest of Asia, enormous foreign reserves and a staggering $800 billion in overseas assets. Its citizens are the world’s greatest savers. What then has brought Japan to today’s sorry state? Most inescapably, a lack of leadership and political will when it comes to forcing a change in course.

Norio Ohga, the chairman of Sony, likens Prime Minister Ryutaro Hashimoto to President Herbert Hoover at the onset of the Great Depression, fearful of trying something new in the face of inexorable deterioration. Ohga fears that a collapse in Japan could set off a global recession.

President Clinton is more charitable to his colleague, blaming Japan’s notoriously rigid and powerful bureaucracy--especially the Finance Ministry--for blocking change. The bureaucracy, with its too-cozy ties to special interests, does bear a heavy responsibility. But that does not excuse Hashimoto and his rivals within the ruling and ambition-ridden Liberal Democratic Party. Even while promising change, the LDP’s leaders continue to equivocate and compete against each other for advantage.

Washington has been urging a program of major fiscal stimulation, along with sweeping deregulation to make Japan’s economy more open and competitive. Masaru Hayami, Japan’s central bank governor, has added his voice to those calling for tax cuts along with more efficient and carefully targeted public spending. These stimulative steps would erase the ill-advised tax increases and austerity budget adopted just last year. The embarrassment this necessary but abrupt reversal of policy would bring to Hashimoto and his party is a key reason they have resisted acting.

But worsening economic realities can no longer be ignored. Hashimoto is now prepared to accept stimulus measures. The unanswered question is whether the vaguely outlined package his party has talked about will be enough to make a real difference. A lot is riding on the question, for Japan but no less for its increasingly worried trading partners.