Nothing for the Host

Prime Minister Keizo Obuchi met President Clinton in New York Tuesday with reform of the Japanese banking system the No. 1 topic but with nothing substantive in hand. He had left Tokyo with the outline of a plan, a reassurance for Washington and other major capitals that his 2-month-old government intended to do its share to revive the sagging global economy. But by the time he arrived in Manhattan, the plan to handle $1 trillion in bad bank loans was in tatters back home.

His ruling Liberal Democratic Party and the political opposition accused each other of reneging on a compromise deal. Hopes that Japan could put its house in order were dashed again. This was no time to show up empty-handed. The disappointment around the world was audible.

Recession in the world’s second-largest economy--the worst in 50 years--is a drag on other Asian countries struggling for economic recovery in this year of crisis, and the slowdown in Asia is being felt in California and elsewhere in the United States. American exports to Asia are falling, and U.S. companies feel the pinch.

Obuchi, in commenting during his New York visit, was noncommittal about prospects for bank reform. Sensitive to the political obstacles he faces at home, he said: “I’m neither optimistic nor pessimistic on this. I am convinced that we will be able to do something.”

So can Obuchi deliver? Japan needs to protect depositors while overseeing an orderly dismantling of troubled banks. But Obuchi’s party must discard its penchant for protecting the status quo for business and banking interests. That’s not likely, and meanwhile small businesses are being squeezed hardest by the credit crunch.

The compromise bank reform plan came apart when the LDP renewed its insistence on pumping public money into the Long-Term Credit Bank of Japan, which the opposition was prepared to let fall into insolvency. This is the key issue at the moment, and it’s clear that some Japanese banks would not survive true reform. In these cases, public funds should be used to protect depositors, not shareholders.

Obuchi and Japan will increasingly lose credibility if the banking crisis is allowed to fester. If the prime minister is unable to forge acceptable legislation upon his return to Tokyo, an opposition call for new national elections is probable. Just the prospect of that might further deepen paralysis in policymaking and surely would delay bank reform. That’s something Japan and its trading partners cannot afford.