U.S. Calls for Japan to Push Ahead With Economic Reform

An address by Treasury Secretary Paul H. O’Neill here on Wednesday calling for reform, political resolve and an end to economic muddle in Japan included many of the same messages voiced for years by the Clinton administration. But in a nation where style is extremely important, the tone and approach were very different.

Japanese analysts said the Bush administration’s softer line is a welcome change as the war in Afghanistan wanes and Tokyo and Washington refocus on increasingly critical economic issues.

“Clinton’s approach was not such a comfortable one for the Japanese people,” said Osamu Ishii, international relations professor at Tokyo’s Meiji Gakuin University. “He gave us pressure, issued numerical trade targets [on the amount of foreign goods he wanted us to buy], visited China for as long as nine days without stopping here and seemed to ignore the U.S.-Japan Security Alliance.”

One argument O’Neill used in his address at the Japan National Press Center was that Japan should follow the U.S. example.

Faced with its own downturn, O’Neill said, the United States moved quickly, cutting interest rates 11 times since early last year and laying the groundwork for a major economic stimulus package, all of which will produce a U.S. recovery soon, he predicted.

In the interest of Japan’s citizens and the rest of the world, he added, Japan should follow suit.

O’Neill also sought to appeal to Japan’s pride, arguing saying the country can return to former days of economic glory if it focuses on productivity and follows through with well-reasoned policies.

“Some commentators have given up hope that Japan can again be an engine for world growth and prosperity,” he said. “But I believe the critics who are ready to write off the Japanese economy are wrong.”

Finally, he sought to express empathy for Japan’s fear and pain. All countries endure periods of difficult economic adjustment, he said, including the U.S. starting in the late 1970s and the United Kingdom several years later. Japan’s experience weathering the two 1970s oil-price shocks despite job losses and company hardship show Japan has the wherewithal to change, he added.

Although the U.S. view is a factor, said analysts, the main show is local.

“To some extent, the U.S. always puts pressure on Japan,” said Yoichi Shinkai, a professor with Osaka International University. “But the old guard just ignores the U.S. Ultimately, change will depend on how the different political camps resolve their differences.”

On one side are those officials who argue that Japan’s troubled economy must first be revived before any thought can be given to deep-seated structural reform. These tend to support public works spending and resist any significant change in the status quo.

On the other side, a camp that in theory includes Prime Minister Junichiro Koizumi, are those who argue that bloated or unprofitable factories, banks and semi-governmental agencies need to be scrapped, stimulus spending cut drastically and higher unemployment and other short-term pain tolerated if Japan hopes to get back on track.

The U.S. finds itself in a touchy position. Pushing the “no-pain, no-gain” line too hard is problematic as Japan’s economy is so fragile, and a serious financial meltdown could endanger the global economy. If that happened, all reform bets would be off as all sides raced for short-term band-aids.

The difference between Washington’s current calls for change and those by past administrations partly reflects the growing awareness among Japanese of just how bad their nation’s problems are.

A decade-long slump, steady downgrading of Japanese credit ratings, the stock market’s sharp drop, rising unemployment, the highest government debt levels in the industrialized world and deflation have made the point eminently clear. Increasingly, Washington is making arguments more Japanese are making themselves.

Another factor that makes it easier for Bush officials to speak in a softer voice is Koizumi, whose direct, populist, even quirky style represents a refreshing break from past, generally nondescript prime ministers stage-managed by bureaucrats. And Koizumi and Bush appear to to share common views.

But Japan’s glacial decision-making process and indirect responses have frustrated every recent administration, no matter how noble their initial intentions.

“Koizumi has called for reform for a long time,” said Meiji Gakuin University’s Ishii. “Increasingly, however, his ability to get things done is a question.”

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Makiko Inoue in the Tokyo bureau contributed to this report.