As Weak Link in World Economy, Japan Sweats

The US-Japan relationship sometimes seems like a global game of chicken in which the guys in one roadster can't even find the keys. Meanwhile the other car - the one made in America - keeps bearing down, headlights on and horn blaring.

In all likelihood, a collision will be averted in coming days, but it's always hard to be certain in the final moments.

The issue this time is Japan's weak economy and whether the government is doing enough to turn it around. The US is simultaneously playing enforcer, loudly demanding urgent action, and holding out a reward for good performance.

If Japanese Prime Minister Keizo Obuchi can resolve a longstanding parliamentary deadlock over ways to help this country's troubled banks, he will have an opportunity to meet President Clinton next week with concrete achievements in hand. Not only will the leaders of the world's two biggest economies be able to proclaim a united front against global recession, but Mr. Obuchi also will look good at home.

This week in Tokyo has made plain what is likely to happen if the mild-mannered Obuchi fails to pass his bills and resolve the fate of a particularly large and unhealthy bank: lots of pressure from the US, a plunging stock market, and abysmally low popularity ratings for the new prime minister's administration. A wreck, in short.

Although some of the rhetoric of recent days is reminiscent of

World's two biggest economies can proclaim united front against global recession if Obuchi can resolve parliament's deadlock.

US-Japan trade disputes there is a lot more at stake now than whether widgets made in Toledo get a fair shake in Hokkaido.

Leave out China, and the combined economies of Asia are expected to shrink by more than 2 percent this year - part of a regional economic downturn that is ruining US export opportunities and flooding the US with discounted goods that Asian producers are desperate to sell. This is bad news for Americans because declining exports hurt job growth and cheap Asian imports make deflation more likely.

Japan could make all this so much better, in the view of the US government. If the world's second-biggest economy could turn itself around, Japanese consumers might start buying both from the US and from Asia. But Japan, slowed by recession and hobbled by its debt-soaked financial industry, offers no such engine for growth in the world economy. "Right now," says US Trade Representative Charlene Barshefsky, "we're it."

And being "it" for too long is no fun, whether you're playing tag or absorbing imports. Not only is the US trade deficit starting to swell, but US-Japan numbers are going up so fast they may reach a record-breaking $70 billion this year. On this topic, Ms. Barshefsky is fond of quoting Japanese Premier Obuchi, who has noted that "an extremely large trade surplus" - the flip side of America's deficit - "may trigger friction with other countries."

You bet, Barshefsky seems to say, since such huge imbalances are "politically unsustainable" in the US, especially with congressional elections coming up in November.

Even President Clinton, who may find managing the global economy less wearying than some other items on his agenda, pleaded this week for a "restoration of growth in Japan." But there are at least two reasons Japan's economic troubles aren't susceptible to a quick fix. One is politics and the other is history.

Obuchi and his fellow members of the ruling Liberal Democratic Party (LDP) are finding they must deal with a feisty and opinionated opposition - a relatively new feature of Japanese politics.

These opposition politicians are unhappy with LDP's plans for resurrecting Japan's banks: They want shareholders to foot part of the repair bill, not just taxpayers, and they want to see some changes in the powerful Ministry of Finance. The opposition also demands more disclosure, insisting in particular that the government publicize what it knows about the true health of the ailing Long-Term Credit Bank of Japan (LTCB), one of the country's 19 biggest financial institutions.

The LDP's idea is to arrange a merger for LTCB with a huge trust bank and sweeten the marriage with an infusion of public money, all the while being vague about whether the Long-Term Credit Bank is as solvent as the bank's executives say it is. Too much information too fast, says the LDP, could cause panic. Needless to say, the opposition has rejected this scheme, effectively holding up the passage of laws intended to address the repair of the rest of Japan's banks.

The make-or-break case of LTCB is where history comes in. The bank was founded by the government in 1952 as an institution that could funnel money to key industries and remained partly state-owned until the early 1960s. Despite private ownership, the links remained. Young LTCB bankers, unlike executives of commercial banks, have traditionally joined Ministry of Finance and Bank of Japan officials for year-long training seminars.

The government may be resisting disclosure because a full accounting of LTCB's problems could reveal the culpability of finance officials and even politicians in the bad decisionmaking that led to investments in unsound ventures.

"If you really disclose the financial information of the bank and the reasons they made certain loans, the government is going to get in big trouble, as well as some big politicians," asserts Isamu Ueda, an opposition lawmaker. Even the LDP's Yasuhisa Shiozaki, a member of Japan's upper house of parliament involved in finance policy, admits that the government's go-slow approach to disclosure amounts to a coverup of bureaucrats' own role in the bank's dire situation.

"What the opposition is saying is partly true," Shiozaki adds. "I don't deny the responsibility" of the Ministry of Finance and the Bank of Japan. He defends his party's desire to keep LTCB from outright collapse, but acknowledges that Japan has an "overbanking" problem. "I could never imagine that all 19 [major commercial] banks could survive as they are."