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COMMENTARY: A MAJOR ROADBLOCK FOR REFORM: THE U.S. (int'l edition)

When asked who really runs Japan, the Japanese management guru Kenichi Ohmae sometimes answers: ''The United States.'' It's more than a glib remark. A strong argument can be made that Japan can't and won't change economically in the way the U.S. publicly demands because of the very nature of the two countries' interdependence. Ironically, moreover, the U.S. in some ways is shielding Japan from pressure to change.

Since World War II, Japan has served essentially as a U.S. vassal state. The U.S. has provided for most of Japan's defense, guided its foreign policy, and thrown open American markets to its ever-expanding export machine. The vassal has provided the U.S. with key strategic products ranging from semiconductor-production equipment to laser diodes while recycling its billions into the American economy. If Japan got into serious peril, the U.S. would bail it out. And despite howls from industry, Washington would let Japan's trade surplus soar further.

YEN FIX. The reality is that Japan's economy, the world's second-biggest, has become too important to tamper with. Thus in 1995, when a soaring yen put seemingly life-threatening pressure on Japanese exporters and banks, the U.S. Treasury Dept. teamed up with Tokyo to intervene massively in foreign-exchange markets.

Just last month, Treasury, the U.S. Federal Reserve Board, and the Ministry of Finance acquiesced in a market-driven strengthening of the yen. Had the yen kept sliding, it would have impaired Japan's ability to raise money overseas and further depressed its economy. China would have had to devalue--and the global fallout would have been vicious.

Washington hasn't been acting out of pure altruism. After the 1995 intervention, a weaker yen meant the U.S. didn't need to raise interest rates, averting pre-election recession. And by easing pressure on Japan's financial system, the U.S. helped protect the largest buyer of Treasury bonds. October's yen rise conveniently sated U.S. industry demands for curbing cheap Japanese imports.

In these ways, Japan and the U.S. are caught in a fatal embrace. ''The U.S. borrows from Japan to buy imports, and Japan's exporters use the resulting profits to build more capacity to sell to the United States,'' says Clyde V. Prestowitz, president of the Economic Strategy Institute, a Washington think tank. ''Any breakdown in the flow threatens the global economy.'' That's because a loss of funds from Japan would likely force interest-rate hikes in the U.S. and crimp global liquidity.

So despite the rhetoric out of Washington, the U.S. can only go so far in prying change out of Japan. This includes demands for deregulating its economy, restructuring industry, and letting bad banks die. ''If Japan did what the U.S. says it wants Japan to do, there would be tremendous economic upheaval in Japan,'' says R. Taggart Murphy, author of The Weight of the Yen. Japan's current-account surplus--and America's current-account deficit--would disappear, he says. But U.S. consumer spending would plunge.

Adding to the conundrum is Japan's vassal-state syndrome. The U.S. has, of course, extracted many reforms and concessions from Japan over the years. But they have been piecemeal. Japanese political leaders, long used to being led by the nose by bureaucrats, lack the expertise to do the bureaucrats' work. And the MOF has been so weakened by the shame of recent scandals and economic mismanagement that it is too timid to do anything. Besides, Japanese elites know the score. ''There is not a single official in the MOF who knows a world where the U.S. doesn't bail out Japan,'' says a former vice-minister of finance.

Washington will continue to talk tough and make legitimate demands. But it won't let Japan be pushed to the wall. That's the irony of ironies. Treasury Secretary Robert E. Rubin, whose department has usurped U.S.-Japan economic policy from the Commerce Dept. and the U.S. Trade Representative, lectures Japan about the need for real economic reform. Yet Treasury's actions have the effect of letting Japan avoid fundamental economic and industrial reforms. Blame for Tokyo's failure to deal with its globally debilitating recession and banking crisis doesn't only rest with its paralyzed decision-makers. It is shared by the U.S. government's readiness to keep bailing Japan out.

By Robert Neff



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