Tue, Apr 02, 2002 page19

• Japan brewing its own Latin American crisis

  The LDP's chief policy maker admits Japan is heading down the path charted by South America in the early 1980s

  • By William Pesek Jr / BLOOMBERG
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  Welcome to Japan, the Latin America of Asia.

  It's not the message the world's second-biggest economy wants to send to investors around the world. That didn't stop a key politician from describing it as such. In doing so, Taro Aso, the ruling Liberal Democratic Party's chief policy maker, resurrected some troubling questions about Japan's economy.

  Facing reporters last week, Aso brushed off criticism from Washington about Tokyo's handling of its banking crisis. Japan's problems, he said, are manageable. Yet, in making his point, Aso argued Japan's challenges weren't comparable with the US savings and loan crisis, but were much worse.

  "Conditions in Japan now are more like the financial crisis in central and South America in the early 1980s," Aso explained.

  Strange reasoning, indeed, coming from an official trying to reassure us Japan is on top of things. It's like telling a room full of hypochondriacs that you don't have a cold, but Hepatitis A. What are we to make of Aso's suggestion that Japan's woes are as bad as Latin America's two decades ago? Reassuring, it's not.

  Not a man to quit while he's ahead, Aso went on to drop other worrisome hints about Japan's situation. For one thing, he said, the US is "mistaken" if it thinks Japan should tackle its problems immediately. For another, Aso noted, if land and share prices "rose a bit," then that "would clear out a sizeable portion of the bad-debt problem." These points are troubling on a couple of levels, especially when voiced by the man who's in the know about Tokyo's plans.

  First, they suggest the LDP isn't rolling up its sleeves to fix Japan's comatose economy. Second, they indicate the LDP still hopes rising markets and global growth will bail it out -- again.

  Gloomy note

  That's troubling when you consider Japan's fiscal year ended on such a gloomy note. By Friday, the Nikkei 225 stock average was more than 15 percent lower than a year ago. That means shares banks hold on their balance sheets lost even more value, leaving the sector more vulnerable than it has been in years.

  Latin America's crisis, let's remember, was no cakewalk. In the early 1980s, huge economies like Brazil and Mexico were on the brink of default. Countries had issued so much debt -- and their banks had so many non-performing loans on their books -- that an entire swath of the global economy ground to a halt. Worse, the crisis exported financial chaos to markets everywhere.

  The region's US$1.3 trillion crisis forced international action. The White House took a leading role in cobbling together a program to restore calm to Latin America, a key trade zone in Washington's own backyard. A cornerstone of the restructuring plan for countries drowning in bad debt was the "Brady Bond." Countries swapped debt for Brady Bonds backed by collateral put up by the World Bank and IMF.

  Ever since Argentina again plunged into crisis last year, a dour joke has made the rounds in Tokyo: What's the difference between Japan and Argentina? Three years. After hearing Aso's comments, the joke doesn't seem so funny after all.

  At the end of last year, it was surreal to see Japan emerge as a problem along with Argentina in the global credit markets.

  `Bank survivability'

  Hardly good company for a G7 nation to be in, but it's where Japan found itself. No, Japan, with its wealth and seemingly infinite resources, isn't in Argentina's league. But while Argentina is the economic world's basket case, some investors wonder if Japan is heading that way.

  Standard & Poor's, for example, recently introduced "bank survivability assessments" for big money-center banks in Japan.

  Where do you suspect S&P first used these evaluations? Latin America. A pure coincidence, perhaps, but a sign of just how concerned the outside world is about Asia's biggest economy.

  Japan used to be Asia's superpower; an economic engine and geopolitical anchor. Eleven years of recession and complete paralysis in Tokyo have changed that. Japan is being relegated to a second-string economy. Trouble is, a Japanese crisis would do far more damage to the global economy than an Argentine one.

  Procrastinating

  You would be more hopeful if Aso and his LDP colleagues were working furiously to repair things. That means forcing banks to reduce bad loans, slashing public spending and introducing competition in the economy. What they're doing instead is procrastinating -- hoping rebounds in the US, Europe and the rest of Asia boost growth here too.

  It makes you wonder about recent predictions that Japan's economy is bottoming. So what? The nation is looking at years of painful, destabilizing and ultimately ugly reforms. How that makes Japan a buy in the minds of some investors is a mystery.

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