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(06/29/2001 - Prestowitz) Japan's Window

Japan's Window
Clyde V. Prestowitz
761 words
29 June 2001
The Washington Post
FINAL
A37
English
Copyright 2001, The Washington Post Co. All Rights Reserved


After the controversies of his recent European tour, President Bush's informal Camp David meeting this weekend with Japanese Prime Minister Junichiro Koizumi may seem a lesser event. But with the world's second-largest economy on the verge of a meltdown that could trigger a deep global recession, helping Japan reinvent itself is one of the most pressing issues now confronting the administration. It is also one that will require a shift of longstanding U.S. priorities and assumptions.

For more than 50 years, America's Japan policy has subordinated economic issues to political-military considerations. Indeed, among the Bush administration's first pronouncements were those reemphasizing the primacy of Japan as America's strategic partner in Asia and playing down the need for U.S. economic advice.

But an economically distressed Japan cannot be an effective ally, and it increases the risk of Asian instability. Thus it is precisely because security ties are important that the administration should make fixing the economy its top priority in Japan.

This should be easier than in the past, because whereas previous Japanese leaders resisted discussion of the need for economic reform, it is Koizumi's main concern. He will be carrying a bundle of reform proposals for which he would like U.S. support.

To respond appropriately, U.S. officials must discard the conventional view of Japan's economy as a typical example of market capitalism. On the basis of this assumption, many leading economists over the past decade have urged Japan to fix its economy by using the standard macroeconomic tools of enlarging the money supply and increasing the government's deficit spending to jump start renewed growth. But after years of zero interest rates and unprecedented deficit spending, all Japan has to show for its efforts are history's largest government debt, a further increase in nonperforming bank loans and a slide back into recession.

The standard nostrums haven't worked because Japan's is not a standard capitalist market economy. Rather, much of it is heavily regulated, protected, dominated by quasi-monopolies, and similar to the old Soviet economy, in which the value of the output was less than the value of the inputs. In such a distorted economy, deficit spending on pork barrel projects provides little stimulus and diverts resources to bloated and inefficient construction companies that reduce the economy's productivity. By the same token, easy money may temporarily increase demand, but it only causes further long-run harm if it mainly prolongs the lives of companies that subtract value from the economy.

The fact is that for Japan to regain economic health there is no alternative to fundamental structural reform as a precondition to making the standard macroeconomic tools effective. This is a view held by generations of U.S. trade negotiators, and it is now being wholeheartedly embraced by Koizumi. At Camp David, he will present a series of proposed measures to get rid of nonperforming bank loans in two to three years, dismantle or privatize many government corporations, cut government subsidies and transfer more functions from the central to the regional governments.

In the past, U.S. officials have proposed similar measures, and there is no reason now not to give them the fullest possible support. But it is important for Japan to do much more in terms of deregulation, implementation of effective antitrust policies, reform of land use rules and provision of information to the public. In this regard, it might be worthwhile to initiate preliminary talks on the feasibility of a comprehensive U.S.-Japan free market agreement that would commit the two countries not only to removal of trade barriers but also to undertakings regarding investment, antitrust, regulatory, e-commerce and other key economic policies.

Such a negotiation would provide a way for U.S. officials to have continuing influence on and insight into the development of the new Japanese economy. At the same time it would give Koizumi a powerful tool for overcoming the opposition of vested interests to his reforms.

More important than the mechanisms and details, however, is an unambiguous U.S. commitment to restructuring. It is important for the administration to take a public stand. Any ambiguity will strengthen opponents. We cannot afford to lose the unique opportunity that political developments have presented for finally restructuring and opening the Japanese economy. Much depends on our seizing the moment.

The writer is president of the Economic Strategy Institute and a former trade negotiator in the Reagan administration.

The Washington Post

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