Economic engineers struggle in public

SLOWDOWN EXPOSES SPLITS IN JAPAN INC.

March 07, 1992|By John E. Woodruff | John E. Woodruff,Tokyo Bureau

TOKYO -- A worsening economic slowdown here has put the silver-haired stewards of "Japan Inc." at each other's throats in a rare public struggle to control the levers of economic policy.

The hoopla over how to reignite the economy -- especially a pulling and hauling over interest rates -- is common during

economic slowdowns in the United States or Britain.

But struggles within the establishment rarely become public in Japan.

Now the Japanese are getting glimpses of life at the top that directly challenge the "Japan Inc." image harbored by many foreigners and locals.

Caught up in the squabble are many of the fabled institutions that guided Japan's post-World War II "economic miracle" and created the world's No. 2 economy.

Among those squaring off:

* The Ministry of International Trade and Industry, often listed as the brains of the economic miracle, vs. the Bank of Japan, keeper of one of the world's strongest currencies.

Interest rates, which the Bank of Japan has eased only slowly in an attempt to hold off a resurgence in inflation, "need to come down as much as possible as soon as possible," MITI Minister Kozo Watanabe said this week.

* Senior conservatives of the Liberal Democratic Party, which has governed uninterrupted since the end of the U.S. occupation, vs. the Ministry of Finance, gatekeeper to one of the world's most conservative fiscal policies.

Last weekend, the finance ministry demanded a moratorium on public pressure for a new cut in interest rates. Top Liberal Democratic Party figures didn't wait 48 hours to defy the ministry's demand.

Others have openly criticized the government's portrayal of the nation's economic health.

"The current economy is much worse than it has been perceived in the government's macroeconomic statistics," said Gaishi Hiraiwa, chairman of the Federation of Economic Organizations, the innermost circle of corporate Japan.

Promise at stake

At stake is not only Japan's own near-term economic prospects, but also its ability to come through on a key promise that Prime Minister Kiichi Miyazawa made when President Bush visited in January.

The prime minister said Japan would "become the engine" to pull the world out of the spreading slump of the 1990s.

That could be a tough pull, given the country's current economic state. "This time, they really don't have any way out," said Scott Foster, senior analyst for Smith New Court Securities. "Japan's classic escape routes -- borrowing, exporting their way out, consumer spending -- all are sealed. The momentum is spent, at least for the time being."

U.S. consumers are also affected by what happens. Japan's interest rates have a profound effect on the U.S. Federal Reserve Board's freedom to lower interest rates and help jump-start the U.S. economy. If the Fed cuts rates much faster than the Bank of Japan, the Japanese and other investors might stop buying the trillions of dollars in bonds that finance the U.S. deficit.

At the center of the establishment hubbub is Yasushi Mieno, the career central banker who deliberately and almost single-handedly set the country up for its slowdown.

Upon becoming governor of the Bank of Japan three years ago, Mr. Mieno promptly launched a rapid-fire series of increases in the official discount rate, the interest the Bank of Japan charges to banks and similar to the Fed's discount rate in the United States.

He was determined to wring out inflation, especially the bloated stock and real estate prices produced by the frenzied "bubble economy" of the late 1980s.

But by the time he began to ease off from the 6 percent rate last summer, the Tokyo Stock Exchange had lost 35 percent of its nominal value, banks were facing widespread defaults, and household names such as Toyota, Toshiba and Sony were furiously backpedaling on capital investment plans that once had seemed destined to become grander every year.

Since July, Mr. Mieno has cut the rate three times, to the current 4.5 percent, although it is still well above the 2.5 percent rate he inherited.

Despite the cuts, ever-deepening financial and political scandals have thwarted every attempt to revitalize the stock exchange. Many analysts, including Mr. Foster, argue that the Tokyo Stock Exchange could lose a quarter of its remaining value before it begins to recover.

At the same time, the U.S. recession and Europe's sky-high interest rates have combined with protectionist pressures to limit Japan's usually vibrant export potential.

Now, many economists believe, Mr. Miyazawa's promise of a Japanese-led recovery might end up working in reverse.

"The virtually universal view," Mr. Foster said, "is that Japan's medium-term prospects depend on at least some kind of U.S. recovery, probably next summer, which would then pull Japan and a lot of other countries back into solid growth."

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