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Time to Reform the 'Other Japan'

Security shouldn't be the only topic when Clinton and Hashimoto meet

When Japanese Prime Minister Ryutaro Hashimoto visits President Clinton today, security issues will top the agenda. Just as in the pre-Clinton era, economic matters will be left on the back burner. The protests in Japan against US military bases in Okinawa, the rise of China, and an unpredictable North Korea all make security seem the most urgent issue.

But to downplay economic issues would be a big mistake. That's because the biggest economic issue of all is not this or that battle for market access for film, paper, or airplane flights. It is the struggle within Japan over economic reform.

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America has a big stake in the outcome. Our security and welfare would be greatly diminished if our chief ally in Asia ceased to be strong enough to help us tackle global political and economic problems. And yet, without sweeping reform, Japan will become increasingly feeble economically and rudderless politically. Japan is entering its seventh straight year of economic malaise. Unless it changes course, official forecasts warn, its growth will decline to 1.8 percent a year during the next decade, and to a dismal 0.8 percent thereafter. For a nation whose social institutions and corporate debt loads are geared to high growth, this means ongoing political and financial fragility. Japan's leaders might become too preoccupied by internal problems to fulfill global responsibilities.

Some wishful thinkers suggest that the urgency of the situation will compel Mr. Hashimoto to institute the needed far-reaching changes. But Japanese analysts on the scene doubt that, aside from rhetoric, he will do more than tinker around the edges. Hashimoto faces an unfortunate political dilemma. On the one hand, reform is critical to many segments of Japanese society, including the strong exporting companies and the deeply troubled financial institutions. But those same reforms would hurt many of the principal cash cows of Hashimoto's Liberal-Democratic Party (LDP) - from construction and smaller banks to "mom and pop" stores and farming.

In a sense, this is the dilemma facing Japan as whole. Americans know about Japan's dynamic exporters, such as makers of automobiles and electronics. But most Japanese live and work in the "other Japan," a woefully inefficient domestic Japan. In food processing, for example, productivity reaches only one-third of American levels and is falling further behind. Yet more people work in that sector than in autos and steel combined.

What keeps sectors such as food so backward is a system that shields them from competition at home and abroad. Many sectors are rife with often-illegal cartels that collude to fix prices, block new Japanese entrants, and retaliate against companies that buy lower-priced imports.

WHILE the price of change is high, the price of standing pat is even higher. Only the Japanese can solve their problems. Still, the US can and should help accelerate the process. The single most important step is for Treasury Secretary Robert Rubin, in cooperation with Tokyo, to take quick action to reverse the excessive weakening of the yen.

As Fuji-Xerox chairman Yotaro Kobayashi stresses, a rising yen is the single most powerful force for reform in Japan. In the early 1990s a soaring yen weakened the cartels' grip, drew in imports, and drove monopolistic prices down as much as 30 percent from tuna fish to PCs. Politically, the rising yen induced Japan's exporters to support reform, because it raised the penalty for protection of the inefficient. Ever since Mr. Rubin helped Japan's Finance Ministry engineer a yen depreciation in 1995, reform has stalled, and now imports are falling.

At the Feb. 8 meeting of the industrial nations' Group of Seven, Rubin finally conceded further yen depreciation had to stop. But there has been little follow-up. Currency traders are already testing how much weaker they can drive the yen, with 130 to the dollar often mentioned as the next target.

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Nor does letting the yen continue to weaken benefit America. An overly strong dollar may temporarily help keep US inflation and interest rates a little lower. But, as we have seen over the last 20 years, when the dollar flies too high, it eventually crashes. When it does, as in 1994, US bond rates can soar.

The US should seek out allies in Japan who want reform for the sake of their own interests. An illuminating precedent is the negotiation some years ago to lighten Japan's limits on large discount stores. Payback came during the 1991-95 yen rise, when these stores bypassed cartels, stocked imports, and lowered prices. While US working-level officials try to develop plans along these lines, it is hard to gain attention from more senior officials.

There is a lot more at stake here than exporting a few more American auto parts. The kind of changes needed to revive Japan would help produce a more cosmopolitan mindset on issues ranging from economics to security. Deciding to aid that process sounds like a no-brainer.

* Richard Katz is the New York correspondent for Diamond Weekly magazine of Japan. His essay, "Japan's Self-Defeating Trade Policy," appears in the spring issue of the Washington Quarterly.

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