The Real and Present Danger.(economics/Japan)(Brief Article)

Who knows--maybe George W. Bush will be deeply moved by the welcome. After all, a U.S. president gets accustomed to red carpets, but it's not every day he has a stock market levitated in his honor. With Bush- administration officials openly worried about the prospect of a Japanese economic meltdown, the government of Prime Minister Junichiro Koizumi is promising vague emergency measures, possibly including government intervention to prevent the stock market from tanking--at least for the 45 hours Bush will spend in Tokyo this week. Japan's downward spiral used to be a slow one. Now it's hard to watch without getting dizzy. Savers, spooked by an impending cap on deposit insurance, are withdrawing bank deposits and buying gold. Bad loans are accumulating faster than bankers can write them off. Annual reports due at the end of March could reveal that some major banks have no capital left. Yet Koizumi last week ruled out the step most critical to saving Japan: forcibly recapitalizing the banks, firing top management and putting bad assets on the market. There is some debate about just how international Japan's problems will become, but it's increasingly hard to believe that the world's second largest economy can crater without doing significant damage to its neighbors.

With Bush on the way, Koizumi had to create the appearance of action. So he offered up yet another plan-for-a-plan of the sort that has enabled Japan to draw out its crisis for so long. He hinted that he would order the government once again to buy stock held by banks, which have been undermined in part by heavy exposure to the wilting stocks of their own worst loan customers. This prospect briefly boosted the stock market, but Koizumi's chances of getting Japanese officialdom to agree on tougher measures are nearly nil. Neither Finance Minister Masajuro Shiokawa nor central banker Masaru Hayami even attended the key meeting at which the emergency measures were discussed. "They have total policy deadlock," says Adam Posen, a political economist at the Institute for International Economics in Washington.

Already suffering its third recession in 10 years, Japan appears to be headed for much worse. The tipping point--perhaps a cascade of bank failures, perhaps a major corporate bankruptcy--could come soon. Posen reckons there's a 50-50 chance of such a shock occurring within the next six months, and a near certainty it will arrive within two years. By then the burden of government debt (which may soon be rated on ...