US Rift With Japanese Over Clannish Business Deals Widens

THE frustrations of the Bush administration in trying to pry open the most closed parts of Japan's economy have hit a new high. Once wary of making threats, United States officials now openly warn Japan that its clannish and mercantile business practices are stoking anti-Japan fires worldwide and raising barriers to Japanese business.

But the latest US demands, unlike past disputes over specific products, strike at the very core of Japan's economic and political power. As a result, Japanese interests are not only digging in their heels but launching counterattacks against the US.

In an unusually bold move last week, Japan openly criticized the Bush administration for failing to fulfill promised reforms in the US economy, such as reducing the budget deficit. In June, Japan plans to mimic a US tactic of publicly tagging "unfair" trading partners.

Also, Sony Corporation chairman Akio Morita, stated that "it is impossible for Japan to make all its structural systems identical to those in the US, which are not necessarily the best in the world.

"Always thinking that the US system is the best and the Japanese system is inferior is itself a bad idea," he said last week.

His comments run counter to President Bush's call for "a level playing field," allowing foreign firms to better compete in Japan.

US impatience with the Japanese is peaking in at least five areas in which talks have reached thresholds on access for foreign firms: computer chips, construction projects, rice imports, telecommunication sales, and Japanese business groups that exclude outsiders or monopolize markets.

US officials expressed deep regret yesterday at Japan's refusal to beef up further its antimo-nopoly enforcement and break up the cozy collusion of corporate groups known as keiretsu.

One particular measure sought by the US is for Japan to raise the penalty against firms participating in illegal cartels from a maximum 6 percent of sales to 10 percent.

Such reforms lie at the heart of promises by Japan last June in the so-called Structural Impediments Initiative (SII). The US also made promises to Japan under SII, such as improving corporate competitiveness.

In the first annual review of SII promises, the US praised some of Japan's actions, such as disclosing the names of anyone owning more than 5 percent stock in a firm. But US officials warn that basic reforms are still lacking because of the influence of special interests in Japan.

Big business, for instance, whose most visible leader is Sony's Mr. Morita, warned the government not to break up the very system that helped to make Japan into an economic superpower.

"Especially with keiretsu, it seems difficult for the US to understand," says Makoto Utsumi, finance vice minister for international affairs. "The non-transparency of the practice invites a feeling of insecurity in the US and deepens a sense of being a victim."

The US was given a publicity coup last week on the keiretsu issue when the former chairman of an auto-parts company affiliated with Nissan Motor Company exposed the tactics used by the car maker to keep smaller firms in line.

Tetsuya Tsukatani, former head of Ichikoh Industries, said he was ousted by Nissan for opposing pressure from the bigger company to drop contacts with General Motors and Chrysler. He planned to air his complaints about Nissan's keiretsu practices in a personal letter to President Bush.

The US warns that Japan's exclusionary practices invite retaliation, a threat that might change the attitude of Japanese business.

"We can look to the renowned ability of Japanese businessmen to perceive when it is in their interests to make a good investment, and hope that they realize that unless they make an investment in change here [in Japan], their investment op-portunities abroad will be severely undermined," says Charles Dallara, US assistant secretary of state for economics.

"It won't be easy for the US to keep an open investment climate if Japan sticks to the keiretsu," he added. "In the US and elsewhere, the lack of tolerance toward the Japanese exclusionary practices - induced by the keiretsu - is really growing significantly."

In talks aimed at opening Japan's telecommunications and semiconductor markets, the US has run into resistance because of Japan's strategic economic advantage in these industries. US officials have warned Japan to remove barriers to foreign competition in rice and construction projects by this summer. But such actions would threaten two pillars of the ruling Liberal Democratic Party: rural voters and the construction industry.

The US sees the opening of Japan's rice markets as a key concession to help revamp world trade rules under the talks known as the Uruguay Round.

In a visit to Tokyo this week, Vice President Dan Quayle called for Japan to put the ban on rice imports "on the table."

Rather than openly pressuring Japan on the issue, however, the US is trying to use private diplomacy, hoping Japan can "show global leadership" and get credit for such a move, rather than overt foreign pressure to make domestic changes.