The comments on Japan's economy by many market watchers last week were more appropriate to Halloween than Thanksgiving--all sorts of witches and hobgoblins threatening meltdown and evil spirits.
But keep a clear head: Japan's economy is not about to collapse.
The correct way to think about Japan's nearly $4-trillion economy--roughly half the size of the U.S. economy--is as an old friend who has struggled with a painful disease for a long time and is now finally undergoing surgery.
The surgery will be painful but therapeutic. The recovery may be slow, but ultimately health will be restored.
How long is "ultimately"? "In 10 years we'll see a sizable net plus to our economy from the reform process beginning now," says Takashi Kiuchi, chief economist of Long Term Credit Bank of Japan, a leading government institution. "But the first two years will be a minus."
He is not saying that Japan will fall into recession. Kiuchi predicts 1% growth for Japan in 1998. But times will be difficult, he says: "We may see a series of business failures, beginning with financial institutions. But if the government stands behind depositors, then optimism can return."
So far the Japanese government has stood behind depositors and small-investor clients of Yamaichi Securities, Hokkaido Takushoku Bank and other failed institutions.
It must keep doing so, says Kenneth Courtis, the Tokyo-based economist of Deutsche Bank. Courtis worries that the government, intent on reducing Japan's budget deficit, will hold back on necessary public spending as President Herbert Hoover did at the start of America's Great Depression.
Note well: Kiuchi and Courtis live and work in Japan and see its complex economy up close. We need to look at it up close too to understand the prospects for this major economy, which will affect the U.S. and global economies no matter how it performs.
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First, as Japan goes through its own restructuring, it cannot be the engine of Asia's recovery that President Clinton asked it to be last week. "It cannot be the engine of Asia without a robust economy," observes economist Lawrence Lau of Stanford University.
Yet in the very cure for some of its economic ills Japan can become a vigorous economy once again.
Some of its problems are familiar to most developed nations today: Japan is trying to get its citizens to pay more for medical insurance and to retire at 67 rather than 65 to ease strains on the pension system. The U.S. and other countries are trying the same remedies.
