Japan, Game Over

This autumn events in Tokyo led many observers to believe that Japan was ready to restructure its profoundly dysfunctional banking system. These hopes were soon dashed, however, as the "forces of resistance" to economic reform marshaled their resources and persuaded Prime Minister Koizumi to eviscerate the banking program. A mood approaching dejection has subsequently fallen over Japan specialists in that country and around the world.

Robert Madsen contends that the temporary surge in optimism was unrealistic. Not only are the political barriers to reform so formidable as to prevent any but the most rash of prime ministers from undertaking it, but the chances of such a campaign resolving Japan's economic problems are at this point negligible. Reform may still help on the margin, but the most important factors in Japan's return to macroeconomic stability must be price inflation, a significant change in the exchange rate, and greater exports. Rather than continuing to urge the country to reorganize its banking and industrial sectors, therefore, the United States must soon begin preparing for the consequences of an eventual market-driven adjustment. These include political instability within Japan; increased tensions in Tokyo's diplomatic and trading relationships; and, quite possibly, a wave of price deflation that spreads around the globe and pushes other economies toward, or into, recession.

Participants

• Robert Madsen
  Fellow, Asia/Pacific Research Center, Stanford University