by Dr. Stanley Kalpage
Not so long ago, Japan's economic achievement was being hailed as a miracle. After total destruction in World War II, Japan was determined to overhaul and modernise its institutions. Even the US was looking to learn how Japan had transformed itself into the world's most effective power.

Today, although it is the second largest economy in the world, Japan is in deep financial crisis. A nation once held up as a paragon of financial progress has sunk into recession. Financial strategists suggest that because of weak domestic activity and financial turmoil in Japan, investors should be prepared for a collapse in currency rates even in the G7 countries, led by the US. The collapse in money rates in Asia is already visible, tensions are rising in Latin America and Russia and the trend is making itself felt in Europe.

Gross capital flows into emerging markets in Asia, Latin America and Russia are said to have Used up during the past six weeks. Japan's continuing financial crisis is said to be one reason. Efforts to solve its banking problems are considered crucial not only for Japan but for the rest of Asia and emergring markets elsewhere.

Banking crisis
Although the Japanese government of prime minister Keizo Obuchi has announced a landmark series of bills to stabilise Japan's financial system, including a banking sector plan, its outcome is not clear in view of the wrangling between the Liberal Democratic Party (LDP) govern-ment and the opposition.

The fixing of Japan's banks is urgent. The reluctance of banks to lend is due to one trillion dollars worth of bad loans burdening their balance sheets. This is a major issue at the core of Japan's economic slump.

There is general agreement that the government should bail out depositors but not the owners of failed banks. A quick decision is needed on which banks to close and on how much public money should be used to provide relief for depositors.

Long-Term Credit Bank
At the centre of the banking plan is the controversy over the Long-Term Credit Bank (LTCB) of Japan which virtually collapsed in June and has been forced to arrange a rescue merger with the stronger Sumitomo Trust and Banking Company. The political squabbling has focused on how to handle the floundering LTCB, one of the nation's largest financial institutions.

The ruling Liberal Democrats maintain that the LCTB is solvent and want to save it through a merger using several hundred trillion yen from the stabilisation fund for this purpose. Opposition groups say the bank demand for a 13-billion-yen (98-billion-dollar) pool of taxpayers' money to be made available for recapitalising ailing banks be scrapped and not used for bailing out the LTCB, which is feared to be close to collapse.

The opposition prefers a new public trust agency created to supervise all badly managed banks independent of the Ministry of Finance. Without the necessary majority in the House of Councillors, Japan's upper house of parliament, the LDP is willing to compromise on this issue.

Political opposition
The political paralysis in Tokyo continues about how to fix Japan's ailing banking system. Two months have passed since the Liberal Democratic Party's leader, Keizo Obuchi, was sworn in as prime minister and formed his so-called "economic reforms" cabinet, giving top priority to curing Japan's economic ills. Little has been achieved thus far, due mainly to political wrangling in the opposition-dominated upper house of parliament.

The opposition is challenging the government's entire approach to the overhaul of the financial system. Naoto Kan (51), the leader of the Democratic Party of Japan (DPJ), the main opposition group, has brushed aside the government's proposals and revealed his own proposals. These have become the basis for the latest negotiations for solving Japan's financial crisis.

The ruling LDP has agreed to opposition demands to repeal the Financial stabilisation Law which appropriates some $ 100 billion of public money to prop up weak banks and protect depositors. The Opposition DPJ opposes this piece of legislation saying it perpetuates the "convoy" system, whereby institutions are treated equally as rescue candidates regardless of whether they are well or badly managed.

It's the politics stupid!
The absence of political leadership is a fundamental cause of Japan's financial crisis. There has been so much vacillation in changing a system which has worked in the past but needs changing to meet the requirements of a highly competitive globalised economy.

For example, 15 years after they started talking about deregulation, the government is still making a list of some 642 items to deregulate. The delay has been attributed to the reluctance of many people in the ruling party and the bureaucracy to take effective action because their own vested interests would be affected. In Japan the all-powerful Ministry of Finance is the guardian of the budget and the traditional architect of economic policy.

Only too clearly evident in Japanese politics today are the different approaches to government between the governing LDP and the opposition parties. These go beyond the usual "Liberal" versus "conservative," dichotomy. The LDP is opposed to letting any major banks go bankrupt. The DJP, on the other hand, is for allowing weak banks to die natural deaths. In fact it is said that about half of the 10 national banks in Japan might disappear if the DJP is in power.

The bureaucracy
A further constraint to efficiency is the Japanese bureaucratic system which is structurally corrupt. There is a strong nexus between business, the economic ministries, banks and the ruling Liberal Democratic Party in each aspect of Japanese corporate and public life. This was of course the system that has brought much material prosperity to Japan. But today it has outlived its usefulness and the Japanese people are losing trust in the system.

Earlier this year, a string of corruption scandals in Japan have been blamed on "systemic fatigue". This ambiguous term refers to the system's inability to deliver the goods while continuing with age-old practices and structures.

Japanese society is known for its extraordinary social strength and cohesion There is strictly no separation of powers between the executive, the judiciary, the legislature and a vigilant media sector. In fact there is much collusion among all these legitimate organs of the state Investigation into the string of major financial institutions that went bankrupt in 1997, has revealed the existence of such collusion.

Both government and opposition have been evasive on taking action to change the system. Politicians have also shown a reluctance to control and lead the bureaucracy. Peter Drucker, writing in defence of Japanese bureaucracy in the current issue of Foreign Affairs argues that the Japanese accord priority not to economics but to society and that the bureaucracy acts, or procrastinates, accordingly.

Japan's importance
The US accounts for 31 percent of the world's economy while Japan's share is some 16 percent of world GDP and some 25 percent of world savings. Japan has experienced an unprecedented three consecutive quarters of economic contraction. During the period April June 1998, Japan's economy shrank by 3.3 percent. Japan's economy problems are contagious and are spreading not only to nearby Asian countries but also further afield to Russia and Brazil.

Japan's economic assistance to other Asian countries has topped $ 43 billion. For years Japan has helped fuel growth in the rest of Asia. Its investment in factories and real estate created jobs and wealth. Its imports of Asian goods provided many countries with a lucrative market second only to the US. Its loans to Asian companies enabled them to expand and diversify. Now in recession, Japan's problem has become the region's problem.

Plan to help Asian Corporations
Despite its severe domestic situation Japan intends to propose to the forthcoming meeting of the G-7 group of countries to make available a sum of $30 billion, to help currency-stricken Southeast Asian countries. The plan called the 'Mizakawa Plan' after Japan's finance minister Kiichi Mizakawa, will encourage corporation in Thailand, Malaysia, Indonesia, Philippines and South Korea to, restructure debt and banks to write of bad loans, to establish social safety nets and to alleviate any credit crunch in those countries.

With its strong trade links throughout the Asian region and many of its manufacturers operating there, Japan knows that its fortunes are closely tied to those of Asia. Japan cannot export to Asian countries unless their economies are healthy, but other Asian nations cannot recover either unless they can export more to Japan. In this integrated system, with Japan as its centre, Japan's quick recovery from its financial crisis and its economic recession is of prime importance to the rest of Asia.