Time For Hardball?

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When Junichiro Koizumi was invited to Camp David one day last June, the Japanese Prime Minister brought along his baseball glove, and the two ball-playing leaders of the world's most powerful economies had a mutually admiring game of catch by the pool. This week, as George W. Bush flies to Tokyo, the first stop in a one-week Asian tour that includes Beijing and Seoul, he has to be wondering if it's time to play hardball. Koizumi, despite his bold promises of reform when he took office 10 months ago, has accomplished little. Japan's decade-long economic slide is only picking up speed, and Bush Administration officials are concerned that further inaction in Tokyo may trigger an economic crisis with global reverberations.

Yes, we've heard tales of Japan's looming economic Armageddon before. But Washington is worried that the fallout from Japan's malaise could hamper a nascent U.S. recovery. Worse, there's no quick-fix option. The world's second-largest economy, Japan labors under the globe's highest level of public debt--140% of GDP. Across the nation, bankruptcies and unemployment are soaring. Practically everything else--stock values, consumer prices, confidence--is in free fall. The biggest crisis of all is the yen. With the Bank of Japan printing money to offset a liquidity crisis, the currency is sliding fast. It hit 134 to the dollar last week, a 15% decline since a year ago. The decline has prompted cries of foul from U.S. manufacturers over the competitive edge a weak currency gives Japanese products. But an equal concern is that an ever weaker yen will force devaluations throughout Asia, exacerbating trade tensions everywhere. Says Kenneth Courtis, Goldman Sachs Asia vice chairman: "It is now really important to get Japan back on track economically, because their problems are about to become ours."

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When he arrives in Tokyo, Bush is unlikely to bash Koizumi in public. In keeping with his chummy, fraternal approach to fellow leaders, he is expected instead to toast Japan's help in the war on terror. But privately, Bush and his aides will try to persuade the Japanese to move quickly to avoid catastrophe. "We're not going to tell them how to reverse deflation," says a senior Treasury official. "But we'll certainly tell them they need to." The most important--and toughest--message will be that Koizumi must force Japan's insolvent banks to write off more non-performing loans before the nation's estimated $5 trillion mountain of public debt crushes the economy. Says a top Administration official: "There needs to be a sense of hurry-up."

Here's why: Although Bush won't see much of it, he is visiting a Japan that is being shaken to its roots by a decade of economic decline. The excess and hubris that once bought Rockefeller Center and Pebble Beach golf courses have been replaced by a growing malaise. Joblessness, bankruptcy, crime and suicide, once rare in Japan, are now just average headlines. In the recession-ravaged hot-springs resort town of Yufuin, citizens are hedging their futures by resorting to barter trade. Taxi rides, sake and even hospital bills can be paid for with a local scrip called the yufu. What backs it? Locals do odd jobs in return for yufu. "Our wealth is slipping away," moans Eisuke Sakakibara, a former Vice Minister in the once all-powerful Ministry of Finance.

This is the moment Japan watchers have long feared. Although the country is enduring its fourth recession since 1990, government largesse has prevented most citizens from feeling the pain. These days the debt crisis is squeezing almost everyone. In Tokyo's parks, permanent communities of homeless live under standard-issue blue tents. As for homeowners, real estate values have declined to 1982 levels, which means houses now are often worth less than their mortgages.

In a land that once guaranteed employment for life, no job is secure. In a recent Kyodo News survey, 70 of 100 Japanese business leaders said they plan to cut wages this year. Wide-eyed, unshaven men walk the subways begging for money. HELP ME, the signs around their necks read, RESTRUCTURED. That's Japan's euphemism for "fired." "We hope this is the bottom, but really, who knows?" sighs Masayuki Watanabe, 48, a meat wholesaler who closed his business three months ago when rumors of mad-cow disease chased away so many customers that it wasn't worth battling the steady increase in local taxes and other expenses.

The worse things get in Japan, the harder it is for a leader like Koizumi to get anything done. Although he cruised into office 10 months ago as the crusading anti-establishmentarian who would truly reform Japan, the dashing, outspoken Prime Minister with the finely tuned coif is in trouble. When he fired popular Foreign Minister Makiko Tanaka last month under pressure from anti-reform conservatives, his approval rating plunged 20% from last year's high of 80%. As confidence in his leadership sagged, the Nikkei stock average hit an 18-year low. "If he wouldn't support her, it's unlikely he'll make any other bold moves," concludes Masatoshi Sato, a senior strategist at Mitzuho Investors Securities in Tokyo.