Japan as Argentina.(possible debt crisis)(Brief Article)

It may seem outrageous to compare the gathering crisis in Japan to the chaos of Mexico in the '80s or Argentina today. Japan is so much more modern, wealthy and, one would think, stable. Yet serious analysts are starting to draw just such comparisons. Here's how the Third World- crisis scenario might play out in Japan.

It begins with foreign hedge-fund managers losing what little confidence they have left in Japan Inc. Spooked, say, by a downturn in Japan's trade surplus, they might issue "sell" orders on billions in Japanese stocks and bonds and yen. Such a rush for the door, warns Takeshi Kimura, head of the international accounting firm KPMG in Tokyo, could be enough to upset the precarious equilibrium in an economy burdened by massive debts. The money flow out of Japan would accelerate the weakening of the yen, increasing the cost of imports and reversing the deflation that has ravaged Japan of late.

The endgame could leave Japan in new, perhaps even more dire straits. Exports would fall even faster, but with rising prices at home-- creating a condition of stagflation roughly akin to Argentina's before the recent devaluation. "This is the pattern often seen when a developing nation's economy implodes," Kimura wrote in a recent KPMG newsletter.

Japan is no developing economy, to be sure. Yet it has assumed that role of late, threatening the global financial system like a moody emerging market. Its currency is unstable. Its banks are undercapitalized. Its neighbors are nervous that what ails Tokyo might jump borders. Japan and Argentina share another trait, too, one that spells headaches for the International Monetary Fund: stubbornness. Just as Argentina clung to the untenable (the peso's hard peg to the U.S. dollar), Japan still hopes against all logic for an economic soft landing. "Japan is stuck in a place where there is no solution," says one construction-industry analyst in Tokyo. "We need a crisis of control. We need the IMF to set policy. We need gaiatsu [foreign pressure] to reorganize our national economy."

Japan and Argentina aren't clones--far from it. But rejecting their similarities out of hand--as the IMF's own No. 2 man in Asia did last week in Tokyo, declaring: "I don't think there is any comparison"-- blurs the big picture. Take debt. Argentina crumbled ...