BUSINESSWEEK ONLINE : JUNE 12, 2000 ISSUE
INTERNATIONAL -- ASIAN COVER STORY Commentary: Why Summers & Co. Have Stopped Bullying Japan (int'l edition) When Lawrence H. Summers took over as Treasury Secretary from Robert E. Rubin nearly a year ago, Japanese policymakers feared the worst. Summers had a reputation as a latter-day General Douglas MacArthur because of his blunt attacks on Tokyo's economic policies while serving as Rubin's deputy. And he had been in his new job only a few days when he launched a fresh salvo, lambasting Japan for trying to weaken the yen in order to boost exports. But now, with the Bank of Japan threatening to end its zero-interest-rate policy, the Treasury chief seems missing in action. Rather than berating the bank for considering a rate rise that some economists fear could send global financial markets into a tailspin, Summers and his comrades-in-arms at the Treasury have avoided saying anything publicly that could be construed as an attack on Tokyo. This may be a case where silence is indeed golden. Yes, foreign pressure--gaiatsu in Japanese--has worked in the past. But there's a limit to how long such hectoring can continue without prompting a backlash. And in the past year, Treasury officials have come dangerously close to that point. STILL SHAKY. That's not to say that the United States should give the all-clear for a rate rise in Japan. The economic recovery is nascent. The stock market is shaky. Japan still labors under a huge overhang of bad debt from the go-go 1980s. And the government's power to goose growth is waning because of its enormous budget deficit. ''I would still be more worried about deflation than inflation in Japan,'' says former White House economic official Daniel Tarullo. Of course, the Treasury's shift to quiet diplomacy may not head off a risky Japanese rate rise. But the new approach could still be good for the global economy in the long run. It will certainly mean not as many bitter public disputes over currency rates and economic policies, which have often roiled markets. It could mark the beginning of the end of the dysfunctional big brother-little brother relationship that has marred ties between the two countries since the end of World War II. The U.S. and Japan, the world's two biggest economies, could even start treating each other as equals. In a sense, the Treasury has little choice but to change tactics. Its attempt last fall to pressure the Bank of Japan into pumping more money into the banking system failed miserably. It succeeded only in enmeshing the U.S. in a very public dispute between the newly independent central bank and its former bosses at Japan's Ministry of Finance. That was hypocritical--for an Administration that prides itself on not meddling in the deliberations of the Federal Reserve. The low point in the relationship came in September at a meeting in Washington of finance ministers and central bankers from the Group of Seven industrial nations. Worried that a strong yen would throw the Japanese economy into recession, MOF officials encouraged the Treasury to browbeat the central bank into printing more yen. The result was a set of understandings that confused the financial markets and left all three participants accusing each other of acting in bad faith. By jettisoning its policy of jaw-boning, the Treasury also is tacitly acknowledging that Japan has made some progress in reforming and revamping its once hidebound economy. Japanese imports of foreign products are up. So, too, is foreign investment in Japan. And Japan has begun restructuring the enfeebled banking system at the heart of many of the troubles of the 1990s. ''There is a bit of optimism in the air,'' Treasury Under Secretary Timothy F. Geithner said recently. Indeed, investment by Japanese companies is picking up, and confidence is improving among consumers and corporations. But all that could count for little if the Bank of Japan's policies go wrong. In the past, Summers & Co. wouldn't have hesitated to tell Tokyo--and anyone else who would listen--just that. For now, they're keeping mum. You never know, it might just work. It has never been tried before. By Rich Miller Miller covers international monetary policy from Washington. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Inside the Bank of Japan (int'l edition) ASIAN COVER IMAGE: Inside the Bank of Japan CHART: Japan Has Cut Rates to Zero...Without Sparking Inflation...But Growth Remains Anemic A Talk with the Taskmaster (extended) (int'l edition) Commentary: Why Summers & Co. Have Stopped Bullying Japan (int'l edition) ONLINE ORIGINAL: "No...to a Stop-and-Go Policy" ONLINE ORIGINAL: "The Public Is Wiser Than the Economists or Government" ONLINE ORIGINAL: "We Called the Policy Board the Sleeping Board" INTERACT E-Mail to Business Week Online

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