The country's ruling elite continues to resist fundamental change

By RICHARD HORNIK

he economic stimulus package announced last week by Prime Minister Ryutaro Hashimoto evoked almost audible, if restrained, sighs of relief from Japan's allies and the global financial community. After months of dithering, Tokyo at last appears to appreciate just how close its economy has come to a deflationary spiral--one which could take with it the rest of Asia and perhaps the industrialized West. But before we break out celebratory sake, everyone should take a hard look at what else remains to be done to restore the Japanese economy to its formerly robust health.

Japan has been through bouts of economic malaise before, particularly following the 1972 boost in oil prices and the rapid appreciation of the yen in 1985. But this time the problem is not disruption of its foreign markets, or even the collapse of its financial sector. As it approaches the end of this century, the country which was widely predicted to dominate the next one faces a fundamentally different challenge than at any time since the U.S. occupying force dictated its constitution following World War II.

The primary cause of Japan's current predicament is, ironically, an important part of the country's earlier success: the post-war development of a symbiotic relationship between government and business which came to be known as Japan Inc. The Liberal Democratic Party governed the country for most of the past four decades, the party's leaders gradually ceding to ministerial technocrats effective control over the running of its economy. Eventually the party and the government bureaucracies, along with the men who ran Japan's biggest companies, formed a politico-economic support system called the Iron Triangle. Every important decision was made by mutual consent, giving Japanese firms a huge advantage against competitors overseas.

But reliance on an all-knowing central bureaucracy has led the Japanese economy into a dead end. The closed market, neo-mercantilist approach to economic development has run its course. Although it proved to be an effective way to reindustrialize rapidly while increasing market share in the expanding global economy, the system also has protected most of Japanese business from the bracing winds of competition. As a result, much of the economy is flaccid at best and redundant at worst.

The technocrats' power to allocate the country's huge stock of private savings fostered a lack of respect for the value of capital by the corporations that benefited from bureaucratic favor. That in turn led to speculative bubbles first in Japan and, after that one burst, to the ones punctured in the past year in the rest of East Asia. Perhaps more importantly, the financial mandarins' power over access to capital denied venture capital for start-up firms in high-tech fields.

And in spite of Japanese pretensions to official incorruptibility, its civil servants have turned out to be just as human as their counterparts elsewhere. Hidden behind walls of secrecy and privilege, many came to believe that whatever was good for them and their particular agency was good for the country as a whole. The results have ranged from the Finance Ministry's resistance to deregulation of financial services to last week's revelation that Bank of Japan officials had been leaking inside information in exchange for favors from Japanese banks.

The Hashimoto plan might jumpstart the Japan's domestic economy and get it running for a couple of years, but it will do nothing to address the country's fundamental ills. It is true that anyone who bet against Japan Inc. over the past 40 years has ruefully come to respect its capacity for recovery. But the economic challenges of the 21st century will require flexibility and a willingness to move quickly to seize opportunities and overcome barriers. The Japanese economy in the past 40 years has specialized in rapid change but only within the context of the Iron Triangle system.

That system now stands in the way of further economic success. The power elite which has run Japan Inc. for its own benefit--and, most of the time, for the country's--must now preside over its own demise. Unfortunately, the auguries are not good. Radical change in Japan's modern history has come only twice, both times following traumatic external shocks. The first was in 1853 when Commodore Matthew Perry sailed his "Black Ships" into Tokyo harbor and forced the country to abandon 250 years of isolation. The second cataclysm came with the country's defeat in World War II, when U.S. occupying forces imposed the socio-economic-political system which eventually produced the Iron Triangle.

In both cases Japan would have been far better off had it been able to change before compelled to do so. Certainly, the Japanese people, who justifiably pride themselves on their sense of national community, have sufficient reserves of talent and personal savings to turn their country around. Thus far, however, they simply have not had the necessary leadership. The remaining months of this century will reveal whether the public's readiness for patriotic self-sacrifice extends to the ruling elite. If not, the only remaining question will be how severe that inevitable third shock must be to crack the oligarchy's ironclad cocoon.