Courtesy Reuters

Japan's Financial Mess

IN DENIAL

Japan's economic performance in the 1990s continues to be disappointing, frustrating, and worrisome. Tokyo's economic sluggishness in the financial sector is souring life at home and setting off international reverberations. Much of Japan's financial weakness is mirrored in other Asian countries. More important, Japan's failure to deal with its economic woes provides a cautionary tale of the resistance to reform that should be expected elsewhere in the region.

Despite government and media portrayals of imminent "big bang" financial reforms, the reality will be far less dramatic. Among bureaucrats and politicians there remains a strong faith in the Japanese style of capitalism and a resistance to truly liberating financial markets. Nor is the Japanese public clamoring for deregulation. It associates such reform with unemployment and instability in personal lives. Indeed, the Japanese have spent the past half-century trying to reduce such uncertainty.

The problems of the 1990s were started by the bursting of the real estate and stock market bubbles of the 1980s. The government deserves much of the blame for the financial excesses and the stagnation that has followed. Dogmatically conservative attitudes toward macroeconomic policy are delaying recovery. The financial sector is swamped by a mind-boggling array of bad debts and underfunded pension liabilities, amounting to as much as $1.5 trillion. Scandal after scandal exposes unethical or illegal behavior in the financial sector and government. And many of the policies being adopted to clean up this mess will delay resolution of the bad debts and counterproductively increase government control over the financial sector.

Despite the torrent of pronouncements from Tokyo about economic stimulus and deregulation, the world will be disappointed with the results. While some financial deregulation will occur, those who believe that Japan will adopt an American economic model are mistaken. Japanese bureaucrats and politicians, including the elite at the Ministry of Finance, continue to be in deep denial. They do not comprehend the extent of reforms necessary to restore the nation to economic health. Instead they regard their

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