- The Washington Times - Friday, April 27, 2001

The new Bush administration faces no greater challenge than dealing with Japans deepening recession in the face of an economic downturn here at home.
The Bush administration, however, has acted quickly and brilliantly to nominate Howard Baker as the new ambassador to Japan. There has been "Baker Magic" before: First, when he assumed the prominent position of Senate majority leader where he elevated the Senates climate and committee functions and, second, when he came to Ronald Reagans rescue as chief of staff after the Iran-Contra scandal.
In addition to the Baker appointment, now comes the news that Junichiro Koizumi, a rebel reformer, has been chosen prime minister over the heads of party regulars. Mr. Koizumi has moved quickly to appoint a Cabinet of reformers.
The United States and Japan together make up 40 percent of the worlds economy so their simultaneous downturns could lead to a global economic meltdown. Unfortunately, Japan has been locked into a leadership vacuum. U.S. leadership also is somewhat hamstrung. Our relations with Japan have been strained by unfortunate incidents on Okinawa and, of course, by the February submarine-caused accident off Hawaii.
Even in the best of times, however, the challenges the two countries face would be formidable. Japans long-term bonds have just lost their Triple A rating, largely because Japanese banks are burdened with some $270 billion in non-performing loans. Moreover, investment is flat, causing the Tokyo stock market to sink to a 17-year low, and unemployment has risen to almost 5 percent. Meanwhile, Japans government debt has climbed to nearly 130 percent of its gross domestic product. Finance Minister Kiichi Miyazawa recently exclaimed publicly that government finances were "near a state of collapse." This no doubt helped galvanize the Bank of Japan into policy changes to in effect cut interest rates to zero.
From my overlap with Howard Baker in the White House, I know he can be ever so respectful and both wise and persuasive with heads of government or parliamentarians without appearing to be intrusive or high-handed. As an international attorney, Mr. Baker has dealt with numerous Japanese corporations and American businesses in Japan. This could give him an advantage over the last three able U.S. ambassadors to Japan, who were leaders in Congress but did not know the private sector as well as Mr. Baker.
When Mr. Baker assumes his duties in Tokyo, he will have one bridge to stand on as he seeks to rebuild U.S.-Japan relations. On Feb. 28 and March 1 in Tokyo, 450 Diet members, Americans and Japanese business leaders, and many educators and journalists participated in a national conference sponsored by CSIS, the Center for the Study of the Presidency, and the Inamori Foundation, that addressed Japans malaise under the rubric of a "Call for Leadership." There was a unanimous call for "transformational leadership" a new reform movement comparable to the 1868 Meiji Restoration, the post-war MacArthur period, and the reconstruction of the Japanese corporate structure over the last half-century.
The conference focused on making tough decisions, downsizing, merging, and addressing bank failures. Former Japanese Prime Minister Yasuhiro Nakasone, who himself was a decisive leader, proposed reforming the process by which Japans chief executive is selected. In my presentation, I called for putting in the Cabinet former heads of some of Japans highly successful corporations such as Sony, Kyocera, and Toyota, whose international competitiveness and ability to deal with change is legendary but ignored by the government bureaucracy. Still others called for a corporate revolution involving the maximization of shareholder value and the public holding of those shares now held by the status-quo banks. As former U.S. Undersecretary of the Treasury David Mulford said, "Japan knows what to do, but the people who know are not in the place to do it."
The previous CSIS U.S.-Japan 21st Century Report offered an even more detailed road map for reform. Noting that Japan is 20 years behind the global trend toward deregulation, the report called for Japan to make the tough decisions now, otherwise "an aging and deficit-ridden Japan is likely to face economic ruin in the 21st Century." It called for breaking the bureaucratic culture, deregulating the financial sector to rebuild Tokyo into a true capital market, reforming consumer attitudes, and developing consumer lobbies, decentralizing power, and relocating administrative and political functions outside of Tokyo. Mr. Koizumi himself proposes to privatize the governments large savings system.
Into this mix of opportunity and peril steps Mr. Baker to be the creative steward of what his predecessor Mike Mansfield called "the most important relationship in the world." Certainly, this is true more than ever economically. Mr. Baker cannot do it all, but he can bring his magic to bear building upon new private sector efforts, political reformers in the Diet, and various coalitions. But he must have allies like Dr. Kazuo Inamori, the Japanese entrepreneur whose Kyocera Corporation packages 60 percent of the worlds computer chips, and Shoichiro Toyoda, the former head of the best car manufacturer in the world.
U.S.-Japan historic actions and reactions are instructive. The 1868 Meiji Restoration was an attempt to learn from the West, as was the post-World War II MacArthur period. Later, in the 1970s and 1980s, there was talk of Japan as number one, with many of their companies like Toyota and Sony as the best in the world. Our lagging companies sent study teams to learn from the Japanese quality approach. Now, it is time for them to learn from us and our deregulatory competitive success. Howard Baker can be an invaluable interpreter for this process.


Former Ambassador and presidential counsellor David Abshire is president of the Center for the Study of the Presidency and co-founder of CSIS.

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