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United States/Japan: Trying To Figure Out What Works

Washington, 7 April 1998 (RFE/RL) -- Japan, considered the model for economic growth and development in the 1970s and 1980s, is now limping along amid global warnings that it could be facing economic ruin.

The United States, frequently criticized in those same days for its profligate spending and slow growth, is now in an unprecedented period of economic prosperity and development that defies history.

The contrast would seem to suggest a simple comparison between what works and what doesn't work in modern market-based economies functioning in a truly global context. But in fact, even the top experts admit they are stumped as to what exactly is happening.

The chairman of the U.S. Federal Reserve (Central Bank), Alan Greenspan, told a congressional committee recently that "we do not as yet fully understand the new system's dynamics."

He said everyone is "learning fast," but that everyone is also in the process of updating and modifying practices and institutions to try to reduce the risks in what he calls "the new regime."

The updating and learning applies to the U.S. as well as to Japan, experts quickly note. Business Week magazine, which currently features an article on what Japan needs to jolt its economy and an editorial saying "Tokyo is Courting Disaster," follows that with another story warning of hidden dangers in the U.S. economy, and a second editorial cautioning American leaders that congressional spending is threatening to get out of hand again.

What is happening is that both countries are dealing with a rapidly changing global economy in which the old rules no longer seem to work and the new ones are still shrouded in a fog that will take a long time to lift.

The strength of the Japanese economic system was for years believed to be based on the incredible work ethic of the people employed in a system of interrelated families of firms -- known as the Keiretsu -- which was strongly supported, and in many ways directed, by close ties with government and banking leaders.

The globalized economy and the new information openness which is at its core have eroded that closed system.

The crisis came because Japanese banks had made too many (secret) loans in neighboring East Asian countries which are now in financial crisis. That got even worse because the Japanese banks had also secretly put huge amounts of their basic capital into stock markets to make big profits. But when the Asian crisis began, stocks plunged. As the Japanese banks became saddled with as much as 600,000 million dollars in now-bad debts from across Asia, the basic capital of the banks -- in stocks -- also tumbled. Many now are on the brink of bankruptcy.

The situation was made all the worse because the Japanese economy has been stagnant for several years and is now slowing even more. Early estimates are that at best Japan will record no economic growth this year and some are even beginning to predict the economy will shrink by up to 0.3 percent.

The International Monetary Fund (IMF) has been telling Tokyo that it must stimulate its economy -- with tax cuts and increasing government spending -- while it opens up the closed system.

Tokyo took a first step toward making its banking, industrial and financial systems transparent this week with new regulations that remove barriers to foreign investment, require banks to reveal more of their problems, and generally open the system. How well this so-called "big bang" action works, only time will tell.

World leaders from U.S. President Bill Clinton to German economics minister Gunter Rexrodt last week urged Tokyo to get moving on reforms. Their words were backed by the private international financial ratings firm Moody's which changed its view of Japan's triple-A rated debt from stable to negative.

The result of all this has been for popular wisdom to reject all aspects of the Japanese/Asian system. Adopt the American free-style market system, many have said. Just look at how American growth has remained steady, inflation has been kept in the low single digits, unemployment has been at record low levels, and the stock market continues to soar with the Dow Jones averages now hovering around a record 9,000 points.

Yet with all its positive indicators, there are notes of concern. U.S. unemployment took a turn upward in February (to a still low 4.7 percent), money supply has been growing (usually an early indicator of rising inflation), income disparity has been growing, projections for economic growth this year are being scaled back, and corporate earnings reports are more frequently below the levels needed to support the high prices on Wall Street.

IMF Managing Director Michel Camdessus, who has been warning Japan for months that it must reform its basic financial institutions, says no single model can work for everyone. He says that the "other" Asian values -- hardworking people, a strong sense of community and family, and an understanding of the importance of education and savings -- must be kept and "put behind better, more transparent, more market-oriented economies" so they can continue performing wonders.

The one thing the U.S. has that everyone would like to share is consumer confidence. The Conference Board, a New York-based business research organization, says Americans are more satisfied than ever with the U.S. economy. "Neither domestic nor foreign dilemmas are weakening the consumer's faith in the American economy, says Lynn France, the board's associate director.