Leading article: Japan in crisis? - Don't panic

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WHEN THE chairman of Sony says "the Japanese economy is on the verge of collapsing", it is time to sit up and take notice. Especially when he adds a warning that this could "trigger a worldwide recession". To be blunt, even the news that the Japanese economy is going belly-up will hardly cause most people in this country to look up from their Fujitsu computer screens.

But when the man who makes Walkmans compares the inaction of the Japanese government to that of the American in the face of the 1929 depression, then we feel the stirrings of unease. Anyone with a moderate interest in current affairs will be dimly aware that the Japanese economic miracle has been in a spot of trouble for some time. It is ominous that prices have actually been falling in Japan, a sinking feeling not experienced in the West since the Thirties.

The casual student of world affairs is also likely to know that the so- called Asian tiger economies of Korea, Malaysia, Thailand and Indonesia have rather abruptly ceased to function as role models for the brave new world of dynamic capitalism. We may not have at our fingertips statistics such as the fact that east Asia has contributed three-fifths of world growth since 1990, but any intelligent observer can speculate that an Asian collapse taking down Japan as well as the "tigers" could drag down the rest of the world.

So is there cause for fear?

The first point to understand is that Sony is engaged in lobbying the Japanese Prime Minister, who arrived in London yesterday for an Asian- European summit. Here, he will come under renewed pressure to do two things: to reflate the Japanese economy and to reduce further the trade barriers that surround the Japanese market. Both courses of action are strongly supported by Japanese business leaders, disdainful of the narrow domestic outlook of Japanese politicians.

The second point is that, however deep and prolonged the Japanese recession might be, we should remember that it is a very rich country with a skilled and disciplined workforce.

Nor should a big downturn in the Far East - if that is what it turns out to be - necessarily harm Europe and America. We are so used now to the rhetoric of the globalised economy that our future as an open, trading nation might seem more vulnerable than ever to the backwash of global economic tides. But in fact the greater complexity of the world's trading system offers automatic protection against Thirties-style deflation. The response to the holing of the unsinkable Japanese economy is not, then, to scurry for the lifeboats, but to endorse Mr Ohga's plea for reflation and reform.

There is not much we in Britain can do to reflate the Japanese economy - we are already doing what we can by keeping the pound high and buying expensive four-wheel-drives by the shipload.

But we are well placed to offer advice on how to reform Japan's financial institutions, because we have been there ourselves. Back in the 1950s, when Sergeant Bilko found the idea of a radio that was "Made in Japan" hilariously funny, Britain suffered a similar problem to Japan's today. We were stuck in our ways, a set of ways which had been successful - which had indeed ruled much of the world - but which had ceased to work.

Now Japan has found that its manufacturing techniques can be replicated elsewhere, while its conformist education system does not produce the creative skills likely to succeed in the next wave of the global economy. It is notable that while Japan excelled at making hardware, it has fallen behind Bill Gates and British programmers when it comes to software.

Meanwhile, the closed nature of the Japanese financial system means that the Japanese economy cannot easily draw on the resources of international capital markets. In the Eighties, British financial institutions were opened to the world and the attitudes of managers and workforces transformed. Japan's financiers had their "big bang" this week, but they still have a way to go to achieve open, transparent markets.

Already there is an intellectual acceptance of the need for change in Japan, but it needs political leadership to make it happen. So it is right that Mr Ohga should put pressure on the Prime Minister, Ryutaro Hashimoto, to accelerate reform.

It is important to us, too, in the long run, that Japan should succeed. If Mr Hashimoto and his successors can get this right, then Japan will be one of the leading powers in the world in the 21st century. If they do not, that role might pass to China. Imperfect as Japan's liberal democracy might be, it is infinitely preferable as a global power to China's totalitarianism.

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