Headline: Fearing a Link to Japan Woes, Bush Advisers Ponder a Policy

Source: New York Times, 13 March 2001

URL: http://www.nytimes.com/2001/03/14/business/14JAPA.html?pagewanted=print

President Bush's economic advisers, in meetings at the Treasury, the Federal Reserve and the White House, are grappling with the implications of the recent political and economic distress in Japan, fearing it could worsen the slowdown here and in Asia. Mr. Bush and his aides came to office highly critical of the Clinton administration's dealings with Japan — particularly its public criticism of the country's economic management — and they promised they would not lecture the Japanese in public about economic strategy.

So far, they have held to that promise. But in recent days they have begun private meetings on the subject, at which several officials have expressed concern about what one senior aide called the "scary dynamic" under way between the world's two largest economies. "The downturn here feeds the pessimism in Japan," the official said, because it is clear that the United States will not be buying as many Japanese goods in the coming year. "And the faster Japan drops, the more it undermines confidence here."

While there is debate over how much Japan's stock declines influence declines here, and vice versa, market analysts who watch both New York and Tokyo note that in the month of March Japanese companies often liquidate holdings in the United States. The proceeds are sent back to Tokyo to help bolster balance sheets before the close of the fiscal year for Japanese corporations, on March 31. The result is that Japanese investors, who might otherwise keep assets here to take advantage of the stronger dollar, are joining the selling.

Several Bush administration officials said that they were without the main weapon the Clinton administration used to contain the Asian economic crisis three years ago: a booming American economy that soaked up imports and provided liquidity to plunging markets in Asia.

The current troubles in Japan, which include the lack of huge government spending to stimulate the economy, the inability of regulators to clean up a banking system sinking in bad real estate loans and growing political disarray, are quite different from the currency crisis in Southeast Asia that began in 1997 and spread around the globe. Nonetheless, it has been a long time since the United States and Japan, which together account for roughly 40 percent of the world's gross domestic product, were headed for zero growth at the same time.

So an administration that has yet to put its economic team fully in place is trying to assess the risks to a world economy that cannot turn to a single engine of economic growth.

So far the White House has said nothing in public about Japan's simultaneous economic and political meltdowns. Mr. Bush's spokesman, Ari Fleischer, ducked a series of questions on the subject today, falling back on familiar bromides about the strength of the United States- Japan alliance. But the White House cannot stay mute for long. Prime Minister Yoshiro Mori, barely surviving in office, will be at the White House on Monday for a meeting with President Bush.

"They know the reforms they have to make, and I'm not going to lecture them," Mr. Bush's chief economic adviser, Lawrence B. Lindsey, said in an interview today. "There are many talented people in the Japanese government, and they know the right things to do. I think their views will prevail"

But Mr. Mori's arrival underscores the nature of the problem: while Mr. Lindsey and other officials in the new administration have plenty of contacts in the Japanese government, it is not clear that any of them have the power to reverse a strategy that has clearly failed. "Meeting him is a waste of time" one senior administration official said today of Mr. Mori's visit. "But protocol requires it."

This is not how the Bush administration envisioned opening up relations with America's most important ally in the Pacific. Mr. Bush said repeatedly that he wanted to reinvigorate the security relationship with Japan, an area he argued that Mr. Clinton let deteriorate. But that is not likely after an American submarine accidentally sank a Japanese fishing boat in Hawaii, causing distrust there of the American military.

There is no shortage of ideas here, even if they are not being publicly pressed. At the Treasury and the Federal Reserve, career officials have talked for a long time about the need to set up an equivalent of the Resolution Trust Corporation, which liquidated insolvent savings and loan institutions in the 1980's and sold their assets, often at fire-sale prices. But Japan has resisted doing that on a large scale, partly because of political concerns about closing banks, and partly because the sales themselves would establish how little the assets of the banks are worth.

Now, one senior official said recently, Tokyo may no longer have the money available to perform that kind of rescue of the banking system. That concern was reinforced when Japan's finance minister, Kiichi Miyazawa, declared last week that after years of spending on public works projects, the government's coffers were "near a state of collapse." He withdrew the comment, but the view here was that he was caught uttering a obvious truth in public.

Other officials have talked about encouraging Japan to spur inflation, essentially by printing money. But that would encounter political opposition, in part because Japanese have memories of the damage of rampant inflation before World War II.

The trade representative, Robert Zoellick, has said he plans to reinvigorate discussions about deregulation, perhaps starting with the telecommunications market. "We will be working with and urging the Japanese to deregulate their economy so as to create more competition for both Japanese and American firms," he said. But with deflation considered the immediate crisis facing Japan, few government officials are interested in actions that would further lower prices.

Treasury Secretary Paul H. O'Neill has suggested opening discussions with Japan's business leaders, whom he came to know as the chief executive of Alcoa. But while those leaders may eventually be persuaded to help with long-term reforms, like deregulation of Japan's telecommunications markets, they have little power on issues of fiscal and monetary policy, the immediate problem.

Others have suggested letting the yen fall, making Japanese goods far cheaper here. Some Japanese officials seem to be edging toward that approach. But the political cost for Mr. Bush could be high: a weak yen would hurt American automakers and cost jobs here, posing exactly the kind of problems that plagued his father's administration and contributed to his defeat by Bill Clinton in the 1992 election.

-- Andre Weltman (aweltman@state.pa.us), March 14, 2001