Time to give Japan a chance

THE Clinton administration began its first year in office with clarion calls from the political right and the left to adopt new policies to deal with the mighty Japanese trade juggernaut. As its first year draws to a close, the administration is again under pressure to get tough with Japan, this time over their bilateral semi-conductor agreement.

This is one of the few 'managed trade' initiatives that both Republicans and Democrats have pointed to with pride. The fact that Japanese purchases of US semi-conductors have slipped below the agreed levels is suddenly cause for emergency talks.

It is an area in which the Clinton administration would be wise to act cautiously. The usual sabre-rattling over trade disagreements - skirmishing deemed necessary for US congressional consumption and by the Japanese as evidence of external foreign pressure or gaitsu, that becomes the rationale for unpopular domestic reforms - is not a good idea in the present environment. So much has happened over the past year. On the trade front, there have been historic, positive breakthroughs: the completion of the North American Free Trade Agreement (Nafta) with Mexico; the Asian Pacific Economic Co-operation agreement (Apec), which signals a new US focus on the region; and the 11th-hour salvaging of the Uruguay Round of trade liberalisation talks under the auspices of the General Agreement on Tariffs and Trade. This triple-crown series of trade negotiations will require significant concessions by individual countries, including Japan. It is therefore not a good idea to elevate sector-based bilateral trade deals to the international crisis level before these fragile agreements have even had a chance to work.

Furthermore, Japan is much weaker economically than has been generally thought. Another year of deeper-than-expected recession, indeed the longest recesssion since the end of the Second World War, has taken a big toll. The fragile coalition government of Prime Minister Morihiro Hosokawa struggles to enact political and social reforms as domestic concern and criticism grow over the stagnant economy.

External Japan-bashing under these circumstances can only be counter-productive, as Mr Hosokawa has warned in resisting US-imposed market opening measures such as 'quantitative indicators'.

President Clinton, by travelling to Japan and by establishing a special dialogue with Mr Hosokawa, has demonstrated the importance of the relationship. But even these high- level efforts by two members of a younger generation of world leaders can be undermined by contentious bureaucrats and negative press coverage. A year ago, Tadashi Nakamae, the respected Japanese forecaster, was prescient in his warnings to the new US administration: 'Do not overestimate Japan's real growth potential, especially over the next two years; recognise the vulnerability of Japan's financial system.'

Twelve months later, Japanese analysts are only just beginning to warn of non-performing bank loans of systemic proportions, perhaps equalling the US savings and loans crisis of the 1980s.

Takatoshi Ito, a visiting professor at Harvard's Kennedy School of Government, says the problems have been masked by Japan's much less stringent disclosure requirements. Based on US disclosure requirements and the records of Mitsubishi Bank, one of the best-managed, he estimates that non-performing loans among the 21 leading Japanese banks amount to at least Y30,000bn ( pounds 268bn) or about 5 per cent of total lending. This figure will only grow as the recession lingers. Thus, Professor Ito predicts that Japanese banks face low earnings due to heavy loan write-offs for the next five to 10 years.

Respected economists have also begun to point out that Japan may already have hit the peak of its spectacular growth rates and be on the way down. Gary Saxonhouse, at the University of Michigan, says that the 'trend acceleration' or long-term growth potential - which saw Japanese rates of growth rise from 6 per cent annually in the late 1950s to 9 per cent in the mid-1960s and 12 per cent in the 1970s has been followed in the past 20 years 'by an equally relentless trend deceleration'.

According to his calculations, Japan may have trouble achieving growth rates of 3.5 per cent by the turn of the century. This has as much to do with its loss of the benefits of 'late-comer economic status' as it does with a big projected decline in the labour force and the rapid ageing of its population. Without big structural domestic reforms and other innovations, Japan may be doomed to long-term decline that could have very negative international ramifications.

However, the West, particularly the US, appears to have an historic opportunity to foster some of the institutional change and reform measures on which Japan has tentatively embarked. This is a time to help shape the vision of Japan's new consumer-oriented, post-industrial society, not to bash a system that has to change.