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Unwitting Engine of U.S. Growth

July 26, 1998|David Friedman | David Friedman, a contributing editor to Opinion, is an international consultant and fellow in the MIT Japan Program

Although they failed to predict the stunning losses Japan's ruling Liberal Democratic Party (LDP) sustained in parliamentary elections this month, U.S. trade and Treasury Department officials quickly claimed victory in their quest to transform Japan and contain the Asian crisis. What the results really highlight is the growing philosophical gap between the United States and Asia at a potentially explosive time when U.S. prosperity may depend on Pacific Rim weakness.

The consensus is that the LDP's 17-seat setback in the Diet's upper house, triggering Prime Minister Ryutaro Hashimoto's resignation and the choice of Foreign Minister Keizo Obuchi as his replacement, was a vote for economic reforms long advocated by U.S. officials but resisted by haughty Japanese bureaucrats. Properly chastised by an angry electorate, Japan's leaders must now liberalize the economy and boost domestic consumption, policies the United States thinks essential for stabilizing the yen and Asia's recovery.

To be sure, the election results will likely cure at least some of Japan's political malaise. Over the last three years, budget hawks, who want to control deficits as Japan's population rapidly ages, stalemated pro-growth advocates of tax cuts and other stimulus measures. The country's anemic performance throughout the 1990s punctured grossly inflated real estate and stock values, contributing to a $600-billion bad-debt problem few wanted to address.

When the economy grew at a 3.6% clip in 1996, Japanese leaders thought they could do everything at once: raise taxes, reduce deficits and fix the debt problem with steady growth and export earnings. They adopted an austerity budget just before Southeast Asia exhibited the first symptoms of the region's economic meltdown. While the LDP languidly debated changing course, the economy contracted by a whopping 5% annual rate in the first quarter of 1998.

In wake of the Diet elections, Japan will almost certainly enact consumer-friendly tax reforms to counteract the damage done by its austerity policies. A few banks will be allowed to fail in order to show progress in dealing with the nation's debt mess. Japan will continue to deregulate its economy selectively to appease Washington, its crucial trading partner, and reassure foreign investors.

All this is a far cry, however, from acquiescence to the radical free-market ideology advanced by what Japanese and other Asians call the "Wall Street-Treasury complex." Even where both sides seek the same outcome, apparent convergence masks deep disagreement over the most basic economic and social principles.

The U.S. interpretation of the Japanese election, for example, is highly selective, at best. It overwhelmingly focuses on the Democratic Party, winner of nine seats, and headed by a charismatic former health minister who exposed an AIDs-tainted blood scandal. Now Japan's largest opposition party, the generally conservative Democrats advocate tax and bureaucratic reforms broadly consistent with U.S. thinking.

Almost totally ignored are the even larger gains registered by the Communist Party, which also won nine seats and emerged from the election as the second-largest upper-house opposition party. Running on a populist, anticorporate platform, the Communists drained votes from both the LDP and Japan's hapless Socialists. Their success isn't surprising: Japanese Communists dominate regional politics and hold more local assembly seats than any other party.

It's hard to reconcile such results with the triumph of free-market ideals. Far from validating U.S. policies, the Japanese electorate's rejection of the LDP was more than tangentially motivated by deep suspicion of U.S. motives.

Many Asians disagree with America's cavalier assumption that government intervention is at the root of their calamity. Unregulated global capital, they think, caused the crisis. The region's big losers, Indonesia and Thailand, had the least capacity to intervene when predatory speculators attacked their currencies. Those in far better shape, like Singapore, imposed controls when panic ensued.

The U.S. infatuation with China only reinforces such convictions. Throughout the Japanese election campaign, U.S. officials bitterly decried Japan's closed economy, limited role in regional recovery efforts, stalled banking crisis and reluctance to pay for U.S. troops. Yet, they heartily applauded when China decided not to devalue. At Beijing's request, the Clinton administration snubbed Japan during the recent China junket and, for the first time ever, bought yen to support Chinese currency.

China's monetary stability, however, is only possible because it remains Asia's most closed economy. Speculators can't batter its currency even though its debt problem dwarfs Japan's. Japan pumped emergency aid worth $19 billion into Asia since the crisis began last year, but it was China that triggered the meltdown when it devalued three years ago. China, not Japan, is a regional military threat.

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