The Land of the Melting Sun

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FRANK GIBNEY JR.Japan may look bad today, but no one remembers the really bad old days better than Kiichi Miyazawa. The sprightly Finance Minister--diminutive and animated by nervous energy and a quick wit--made his first trip to Washington in 1950, at the elbow of some of Japan's leading postwar diplomats. Japan was painstakingly rebuilding itself from the ruins of war, and Miyazawa was on a secret mission to lobby for a permanent peace and an end to the U.S. occupation. Last week Japan's senior statesman found himself in Washington on a different sort of mission: to convince an audience of international financial leaders that the world's second largest economy is not about to go into the tank--taking the world along for the ride. You could smell the skepticism. But Miyazawa remained confident: I have always been convinced that Japan can overcome adversity and come out as a dependable, advanced country, the minister told Time last week as he sat in his quiet Tokyo office. It may take time, but we certainly will not be lost.In fact, there is not a moment to lose. The financial crisis that began in Thailand last year continues its rampage through the world's financial landscape. It is a chaotic contagion. Last week markets in Europe, Asia and the U.S. echoed the familiar yo-yo of up, down, up, down, as investors scrambled to sell, buy and sell again. Jitters sent the dollar plunging in its worst drop against the yen in 25 years. The slide wasn't triggered by resurgent confidence in Japan but by a kind of financial wind sprint among hedge funds racing to cash out of heavily leveraged yen positions. No end to the zigzags was in sight. Said Yashwant Sinha, the Finance Minister of India, at the end of the International Monetary Fund meeting last week: The brute fact is that after five days of intense discussions and debate, we are still at a loss as to why the contagion has continued to spread.Everybody agrees, however, that if Japan's already limp economy suffers an economic meltdown, the rest of the world may follow. As U.S. President Bill Clinton put it, The health of Asia and indeed the world depends on Japan. Hailed for two decades as a beacon of growth, Japan's economy has been sputtering for seven years and is now in the third quarter of a nasty, deepening recession. Japan's most immediate problem: its once mighty banks, which face nonperforming loans worth at least $600 billion and, by some estimates, more than $1 trillion. Last Wednesday, on the news that Japan's legislators had finally reached a bank-rescue agreement, hopeful investors pushed Tokyo's Nikkei stock average up a stunning 6%--only to see it drop by as much the following day. It fell again on Friday to its lowest level in nearly 13 years.The man designated to calm the markets and restore Japan's credibility is Miyazawa. An internationalist, the Finance Minister has fought trade battles with the U.S. and wrestled with his own bureaucrats over reform. When Black Monday wiped out U.S. equity markets in 1987, Miyazawa (in an earlier tour as Finance Minister) was a hero: he unleashed a flood of Japanese cash that helped avert an even bigger crash. Last November, when the failure of four of Japan's top financial institutions nearly touched off a panic, it took a call from Miyazawa to prompt then Prime Minister Ryutaro Hashimoto to consider setting aside some money to stem the crisis. Hashimoto resigned last July in the face of a stunning election defeat, and his successor, Keizo Obuchi, appointed Miyazawa Finance Minister in August.Yet today's Japan is worlds apart from the country Miyazawa and his Liberal Democratic Party stalwarts built. The bankers who financed the miracle are now fighting to save themselves. The Ministry of Finance, where Miyazawa started his career, has been reduced by a series of scandals from an all-powerful policy machine to a discredited and disillusioned band of unhappy bureaucrats. And the Liberal Democratic Party, which ruled Japan almost unimpeded until 1993, has seen what was left of its power base erode, as voters lose faith in the economy. In July, mostly because of its inability to act on the economy, the party suffered an election that handed the opposition an effective veto power in parliament. Result: Miyazawa and Prime Minister Obuchi have had to battle the Minshuto (the opposition Democratic Party of Japan ) at every turn.The political rivalry is clearly evident in the struggle over the fate of Japan's banks. Miyazawa originally planned to provide a $98 billion rescue fund for the country's 19 largest institutions. But Naoto Kan, the Minshuto's dynamic leader, served notice that his party would not permit the government to simply bail out the banks. Instead, the opposition initially opposed the use of public funds, arguing in the new lexicon of Japanese finance that poorly managed banks presented a moraru hazaado (moral hazard) and should be allowed to collapse. To make matters worse, younger reform-minded leaders in Miyazawa's own party sided with the opposition leaders, joining them in all-night sessions to try to come up with alternatives to Miyazawa's simple-minded plan, which was merely to throw money at the banks. Generational change is completely changing the process, the Finance Minister conceded with a sigh last week. The politicians have robbed us [at the ministry] of the banking business.PAGE 1  |  
Miyazawa, however, is as much a political animal as an economic one. Last week he helped engineer a compromise that may speed a solution to the banking mess. Under proposed bills, the government will offer an initial $240 billion fund--and more as needed--to any undercapitalized but viaburu (viable, another new word in Japan these days) institution. From Washington to Tokyo, the hope is that the two bills will pass by Oct. 16, the end of the current Diet session. Passage would mean a solid boost. An opposition roadblock, on the other hand, could torpedo the last of the nation's fragile confidence. The sad reality is that even if both bills become law, it may be too late to reverse Japan's decline. Consumers are so nervous about spending that desperate politicians have suggested Happy Mondays--a day when the Japanese people would be encouraged to shop instead of work, enticed by the offer of $220 gift certificates. The pressure on the banks has caused a massive credit crunch that has pushed the number of bankruptcies to an all-time high. With no one spending, prices are diving. The threat of deflation is at our doorstep, says Akinari Horii, general manager in the Americas at the Bank of Japan. Nobuteru Ishihara, a reform-minded LDP politician, puts it more graphically: Last summer we were some distance from the cliff, but now we are less than a foot away.For months, outsiders have offered a simple formula to cure Japan's ills: spend. U.S. Secretary of the Treasury Robert Rubin and Federal Reserve Chairman Alan Greenspan have urged Tokyo to use public funds to rescue its banks and stimulate its economy. Under Obuchi and Miyazawa, the spigot has finally begun to open. After introducing tax cuts and a spending package in August, the government last week offered to throw an extra $80 billion into the economy. When Miyazawa met with Rubin in Washington to review Japan's plans, Miyazawa offered only one new initiative--a $30 billion aid package for troubled economies in Asia--and warned that he could not guarantee that the stimulus package for Japan would have the desired effect. Said the Japanese Finance Minister to his American counterpart: I am crossing my fingers.American officials concede that that may be about all anyone can do. Miyazawa, who turned 79 last Thursday, acknowledges he has little to celebrate. What I have accomplished is not really anything I can be proud of yet, he says. I am just doing my best to minimize the loss. Miyazawa, more than anyone else in Japan, remembers the old days before Japan had much of anything to lose. On his 1950 trip to the U.S. capital, the young bureaucrat bunked with Finance Minister Hayato Ikeda in a $7 a night double at the Hotel Washington. These days Miyazawa prefers a deluxe room at the swank Madison. But if Japan's banks head south this month, he may be eager to get that old Hotel Washington room back.THE MELTDOWN: The LDP and opposition deadlock on meaningful bank reform and extra stimulus measures. The struggle spills past the end of parliament on Oct. 16 and pulls the nervous economy off a cliff.STOCKS: Nikkei drops through 10,000 from 13,000MONEY: Yen dives to 200 to a dollar from 120GLOBAL EFFECT: Bankruptcies skyrocket, and there are runs on banks, which start to fail en masse. Japan enters a depression with prices tumbling and unemployment reaching 5% or more.ODDS: 1 in 3MUDDLE THROUGH: The politicians settle on an awkward compromise for banking reform and new spending to goose economic growth. The solution doesn't help the economy or the uncertain markets.STOCKS: Nikkei continues to yo-yo around 12,000 to 13,000MONEY: Yen bounces between 120 and 150GLOBAL EFFECT: The result is the slow demise of Japan's banks and a bonanza in Japan for foreign investment banks. In the meantime, as Japan continues to groan, Europe and the U.S. implode, and Japan is all but forgotten.ODDS: 1 in 2SALVATION: Everyone agrees on a bank-reform plan and stimulus measures that equal almost $1 trillion. The economy begins to recover.STOCKS: Nikkei rises to 15,000 againMONEY: Yen stabilizes at 110GLOBAL EFFECT: This should convince investors worldwide that Japan's leaders are finally implementing the policies needed to reverse the country's decline.ODDS: 1 in 5  |  2