The heat may finally be off Japan

VIEW FROM TOKYO

Observers of Japan over the past seven months have learnt to be wary of expressions like "turning point", as the government and the economy have stumbled helplessly from crisis to fresh crisis. But three things happened last week which suggested that August might be a month of change.

On Tuesday, the Cabinet underwent a partial reshuffle, suggesting a new attentiveness in the ruling coalition as it prepares for a leadership struggle and the possibility of an early election. On Friday, the Prime Minister, Tomiichi Murayama, finally managed to squeeze out the golden egg which he has been struggling to lay all year: an expression of regret for Japanese aggression during the Second World War.

And all week, an unaccustomed phenomenon was observed in the foreign exchange markets: after a year of stifling strength, dipping at one point below Y80 to the dollar, the yen steadily weakened, closing at Y93.75 to the dollar, nearly Y6 more than at the beginning of August. The fall brought immediate relief to exporters, who have seen their profits undermined by the cost of Japanese goods overseas, and to overseas investors, whose dollars and marks rose in value.

The cheer was unexpected because the month had started very grimly indeed. After months of rumours about the bad debt crisis among Japanese banks, a newspaper report about the wobbly Cosmo credit union provoked a panic among investors. The Bank of the Japan and the Tokyo metropolitan government provided multi-trillion yen cash infusions and plans were drawn up to dismember Cosmo.

Scenes like this have been predicted for months, as the Bank of Japan has revised upwards its estimate of bad loans - the current assessment is Y50 trillion, almost unanimously assumed to be an underestimate. It is certain that there are other Cosmos out there, just waiting for a headline to wipe them out. So how has Tokyo moved from such intimations of financial doom to a position of relative, if frail, optimism?

The answer may be that a banking failure was just what the men at the Ministry of Finance (MoF) needed. For there is no doubt that it is from the bureaucrats, rather than the politicians, that any solution to Japan's financial crisis will come. Even under a strong Prime Minister, they are a notoriously independent bunch, confidently immune to the whims of passing politicians, and supremely secure in their position as the permanent engine room of the Japanese economy.

But strong ministries, unlike strong governments, do not move quickly. In recent months MoF's habitually stony demeanour has looked less and less like haughty authority and more and more like paralysis. The traditional bureaucratic approach was plainly inadequate to a cliff-hanger situation when the stock exchange was plummeting, the currency soaring, and the banking system threatening to go into meltdown.

The Cosmo crisis was the best kind of bad news: mild enough to be kept under control, but scary enough to galvanise the bureaucrats and shock taxpayers out of their sceptical reluctance to make public funds available. some analysts even saw the whole thing as a brilliant conspiracy by the MoF, which might have consciously sacrificed Cosmo to get the public on its side. Koyo Ozeki, of the banking researchers IBCA in Tokyo says: "I think it was a sort of gamble to allow a managed panic."

Having shaken off their lethargy, it may be no coincidence that two days later the MoF took on its other great headache: the soaring yen. Or at least it appeared to, with a cautious package making it easier for Japan's life insurers to invest their wealth overseas.

The outward flow of yen immediately brought the currency down, and securities markets all over the world perked up in expectation of a rich serving of Japanese cash. But the sustained downward turn was in large part due to dollar buying by the Bank of Japan and, most importantly, by the US Federal Reserve.

Here again, there is a conspiracy theory. Without concerted bilateral action, it was always going to be difficult to beat down the yen, but the Americans have never shown much interest until now. In many ways, the high yen was to their advantage, and naturally counteracted what has enraged the US for so long: Japan's chronic resistance to American imports. The long-running trade dispute came to a head in June when the US finally wrung out of the Japanese car companies a commitment to buy more American parts. Having won this, the theory goes, the US is now happy to join Japan in tackling the mighty yen - with the added benefit of knowing that those newly empowered insurers will be making a lot of their investments in the US.

After months of doom-mongering, Tokyo has suddenly been cheered by a glimpse of a new, almost fairy-tale, happy ending: a bureaucracy galvanised into finally sorting out the bad debt problem; and an export industry, freed from the shackles of the high yen, but rendered sleeker and even more efficient by its period of suffering.

There is still a long way to go - and probably several more banking failures - before this golden land is reached. But Japanese can be forgiven for feeling that in sweltering August, with the temperatures in the hundreds, the heat is finally coming off.

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