Japan’s Dilemma Is a Major Test for U.S.

The latest reports from Washington are that opinion at high levels in the Clinton administration and Congress is growing gloomier about Japan’s economy and the other economies of struggling Asia.

Yet the Clinton administration seems not to know what to do other than whistle past the graveyard.

At least publicly, officials such as Treasury Secretary Robert Rubin and the normally voluble Deputy Treasury Secretary Lawrence Summers are keeping quiet. They are said to fear that any statement would only make matters worse for Japan and Asia and bring on a global recession.

But the world is frightened all the more by their silence. Securities markets tumbled everywhere Tuesday because investors and traders see ominous signs in Asia--Japanese politicians arguing over bank reform; China reducing Japanese yen holdings in its official reserves because it expects lower values.

Yet in reaction, the markets hear only noninvolvement from Washington--weak talk that there is little the U.S. can do to influence world markets.

In reality, say sources in and out of government in Washington, Clinton administration officials have resigned themselves to a further fall in Japan’s economy and are trying to think of ways to protect the rest of the world trading system.

Such resignation amounts to a sell signal, and the markets know it. For if the world’s second-largest economy--$4 trillion in annual output of goods and services, the investment and financial leader of Asia--sinks into depression, there is no way the world can go on prospering.

The sad fact is, such resignation in Washington also ignores history. It was the U.S. occupation under Gen. Douglas MacArthur and American bankers, civil servants and businesspeople who set up the Japanese economy after World War II.

With assured access to the U.S. market and the protection of the U.S. global defense system, Japan erected an economy geared to full employment, production for export and funneling the savings of its people back into industry.

But just as it has for the economies of Europe--America’s other postwar dependency--the time has come for change in Japan. The massive bad loans in its banking system demand to be written off so a fresh start can be made. The paltry 1% returns Japan has made on its citizens’ retirement savings demand correction through a wholesale reform of the country’s financial system.

But those reforms in Japan will take years to work out. And what Japan and the world need in the meantime is strong support from the United States--vocal backing, yes, but also some form of direct participation in refinancing debt, as was done with Mexico in the 1980s and again in 1994.

World markets must know that the whole of Asia won’t be allowed to collapse, taking with it the emerging economies of Latin America, Russia and probably a whole lot more.

In the absence of such support, the mood of world markets grows bleak.

Meanwhile, nothing has really gotten worse recently in Japan’s economy. Estimates of the amounts of bad bank loans range widely, from $600 billion to more than double that. But such estimates also characterized the period of America’s savings and loan crisis, which ultimately proved less serious.

The effectiveness of Japan’s new prime minister, Keizo Obuchi, is questioned inside Japan and around the world. But a longtime expert on Japan, Steven Clemons of the Washington-based Economic Strategy Institute, reports that Obuchi is a most effective politician in the Japanese system and may accomplish much.

What has changed is the knowledge of how deep Japan’s problems are.

For example, questions are now being asked by businesspeople in Japan and the U.S. about the true status of Japan’s legendary $10 trillion in household savings. Those savings, held in guaranteed Post Office accounts, are a stalwart of Japan’s economy. But some of those savings have been invested by the government in public works and company assets and so have lost value. How much, we don’t know.

So the knowledge is growing in Washington and elsewhere that Japan’s economy is in worse shape than most people realized. And the recognition is growing that the measures Japan must take to work out of its problems are likely to further reduce the value of the yen.

The currency fell Tuesday past 147 to the dollar, below the point at which Rubin ordered U.S. intervention in currency markets in June. Economists fear that the yen will decline to 160 or even lower, a level that might well cause devaluations in other Asian countries, including China and Hong Kong.

But again, the real question is not what level the yen should be, but what the U.S. response should be to the danger.

Kenneth Courtis, Tokyo-based economist of the Deutsche Bank, warned recently that “there is no way the world economies can sail on if Japan’s economy goes into depression.”

Clearly, the U.S. needs to assure the world that as Japan undergoes economic reform, Washington will do more than let the markets decide. For the markets will take the world into global recession.

In reality, this period is the major test of the Clinton administration. If it can bring the world through without a global recession, it will be a success, no matter its other troubles. But if it does nothing and the world grows poorer, the administration will be ruled a failure.

The doubts and fears being expressed in world stock markets are not about Japanese economics but about U.S. resolve.

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.