Friday, July 17, 1998

Japan situation calls for strong, dynamic leader

The financial markets rally was almost as stunning as the electoral setback that led to the resignation of Japanese Prime Minister Ryutaro Hashimoto: Any new government can't help but be an improvement.

The Japanese economy is in a worsening recession. Unemployment and bankruptcies are at record highs, consumer confidence at record lows and the banks stuck with $600 billion in bad loans (that's four times the size of the U.S. savings and loan debacle).

Presiding over the recession, as it has presided over Japan almost nonstop since World War II, is Hashimoto's Liberal Democratic Party. Despite the setback at the polls Sunday, the LDP remains in firm control of parliament and the new prime minister, to be chosen by Tuesday, is likely to be a Hashimoto clone.

The new prime minister's policies are almost certain to be a continuation of Hashimoto's cautious, consensual and incremental changes in a financial system that has grown too inbred. His one bold, decisive move -- a baffling increase in the consumption tax from 3 percent to 5 percent -- only worsened the recession.

The solutions to Japan's recession are not particularly radical or novel: deregulation, disentangling the government from private investment decisions, financial "transparency" (a fancy way of saying honest bookkeeping and lending), loosening prohibitions against imports and outside investments. All these changes, however, would involve wrenching changes in the way the Japanese do business, a way that worked very well for them up until the 1990 real estate bust.

Neither Hashimoto's likely successors nor the fragmented opposition parties show any evidence they are up to those changes. Financial markets are rarely over-optimistic, but they may well have been in thinking that anybody but Hashimoto would be an improvement.