Concern over Japan's third recession in a decade and frustration with the inability of its leaders to spark a recovery has led the Bush administration to jettison a promise not to lobby Japanese officials in public for action.
US Treasury Secretary Paul O'Neill has said he will pressure his Japanese counterpart, Finance Minister Masajuro Shiokawa, at meetings this weekend in Ottawa, to take steps to clean up the banking system and boost growth.
"Reality has set in," said Gregory Fager, the top Asia specialist at the Institute of International Finance.
"The Bush team came in saying they weren't going to be as critical as the Clinton officials and then they realized Japan is a source of instability and that they have to apply pressure."
O'Neill first changed his tone during a visit to Tokyo in January, breaking the pledge he and White House officials made last year to reverse Clinton administration policy and counsel Japan in private. The reversal reflects alarm within the US government that unchecked stagnation in the world's second largest economy has financial and geopolitical implications for itself and other countries, analysts said.
The Treasury secretary told Japanese officials in Tokyo on Jan. 23 that their efforts to extract the nation from an 11-year slump had failed. Policies aimed at cheapening the yen and boosting public spending should be replaced by efforts to reduce 151 trillion yen of bad bank loans and curb deflation, he said.
"Decisive actions are necessary to solve difficult problems," O'Neill said in a speech at Tokyo's National Press Club. "Returning to robust and durable growth is of the utmost importance to Japan, to the US, and to the world."
Japanese consumer prices have fallen for 27 consecutive months, retail spending dropped for a fifth year in a row during last year and unemployment has reached a record 5.6 percent.
Data released on Friday showed household spending fell in December, cementing a ninth year of declines.
The economy won't grow in the fiscal year beginning April 1, according to government forecasts.
Domino effect
Deterioration in Japan's economy will have effects beyond its borders, analysts said. John Makin, an American Enterprise Institute economist, predicts Japanese savers will shrink their bank accounts when deposit insurance coverage is pared back in April, calculating the resulting fallout will cost the government US$1 trillion to fix.
"Such a crisis would reverberate through the global economy and financial markets," said Ron Bevacqua, a senior economist at Commerz Securities (Japan) Ltd.
"A sharp reduction in demand as the economy implodes would likely be followed by a large-scale repatriation of capital that would leave many economies starved for capital."
Even if such a meltdown is avoided, the ongoing slump could weaken other Asian economies, and perhaps lead to competitive devaluations, analysts said. That could undermine the world economy at a time when the US is in recession.
A global slowdown began in mid-1997 with the devaluation of the Thai baht.
The yen has declined 16 percent against the dollar since the beginning of last year and fallen for the four of the last five weeks on doubts that Japanese policy makers will do enough to boost growth.
Japan's currency fell to ?134.64 per dollar, from ?133.79, leaving it about a half-yen from the three-year low it sank to last month. Just this week it shed 1.2 percent against the dollar and 2.5 percent against the euro.
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