THE DAILY YOMIURI - July 2, 1998

Bureaucratic Meddling Unacceptable

by Steven C. Clemons

U.S. newspapers are now bubbling with "Japan on Its Deathbed" stories.

The yen is at a near decade low against the dollar. The Japanese economy is now shrinking after seven years of stagnation. A number of Finance Ministry and Bank of Japan officials have committed suicide.

To make matters even worse, U.S. President Bill Clinton has skipped Japan on his nine-day official trip to China--perhaps the first time in decades Japan has been so obviously pushed aside during a major U.S. foreign policy initiative in Asia.

Americans are losing patience with the "yo-yo" nature of Japan. Just a few years ago, Japan was seen as a ravenous economic machine that could not be stopped, demanding more participation in international institutions and, particularly, a permanent seat on the U.N. Security Council.

Now, Japan appears dead in the water, paralyzed by its own incompetence at managing its economy. Japan has no external debt--it is a rich nation--and yet its banks are belly flopping in the international system. Capital is racing out of Japan into foreign financial institutions where investors feel they will earn better returns.

Clearly, the United States needs a strong Japan and does not want it to sink. But unfortunately, the Japanese government--much like the captain of the ill-fated Titanic--is not heeding the warning calls of the United States and other countries about the economic glaciers into which it is crashing.

The bottom line to Japan's problems is that its central government bureaucrats--the best and brightest elite officials from the finest universities--disdain market forces. They tend to have more faith in themselves than in markets.

They have followed a mercantilist path of furthering and protecting the interests of strategic industries, rather than securing the broader public interest. One of the strategies Japan must employ if it is to return to health is to compel its bureaucrats to stop arranging sweetheart deals for the firms they one day hope to work for. Structural corruption must end.

This time around, the industry being protected and buoyed along is Japan's insurance industry. As part of agreements negotiated between the United States and Japan in 1994 and 1996 to create greater transparency and deregulation in the Japanese insurance market, a scheme was established to allow U.S. and other foreign firms access to markets dominated by Japan's Godzilla-size insurance firms.

As part of this deal, Japanese firms get to enter a sector of the insurance industry U.S. firms have already thoroughly developed, the "third sector" of specialty insurance products ranging from personal accident to medical and cancer insurance, considered decades ago to be the most unattractive part of the industry--not nearly as lucrative as the life and property-casualty insurance sectors the Japanese government has long protected on its own turf. U.S. companies have innovated and developed this third, once neglected sector, and now derive much of their global revenue from it.

To keep things in perspective, however, the U.S.-dominated third sector represents just 5 percent of the market, while the primary sectors--previously blocked in Japan to U.S. access--account for 95 percent of the market.

To prepare for mutual penetration of these various sectors, the U.S. and Japanese governments agreed to a 30-month countdown, which began ticking on July 1, so each side could ready itself for the new competition. Fundamental to this arrangement was that no firms would jump the gun and enter the race early.

But true to form, Japanese bureaucrats are already allowing early entry to some Japanese firms, trying to marshal a technical defense for a few specific firms that violates the spirit and the letter of the agreement.

It is this kind of behavior--of government officials constantly trying to alter market forces and outcomes--that lies at the root of Japan's economic problems.

Both Yasuda Fire & Marine Insurance and Tokio Marine & Fire Insurance have already entered the third sector, which was supposed to be protected from any radical change during the 30-month countdown period.

Yasuda has been particularly creative by apparently working out an arrangement with a firm called Cigna so it will be able to sell insurance products through a co-owned subsidiary, INA Himawari, which Cigna hopes to sell in total to Yasuda at the end of the 30-month period.

Although Yasuda is not currently the majority owner of the subsidiary, it clearly has de facto control. Yasuda has installed the senior officials of the firm, hired 10,000 new agents, developed a fully integrated computer system and seen a 400 percent increase in premium volume in an otherwise flat, contracting economy.

In a blunter move, the Finance Ministry gave a Tokio Marine subsidiary, Tokio Marine Life Insurance, permission to sell a stand-alone cancer insurance product--a violation of the agreement that blocked nonlife firms from selling life products during the 30-month period. The Japanese referees of this race are cheering their players over the starting line early, and this cannot be tolerated.

At the beginning of June, the American Chamber of Commerce in Japan issued a statement blasting the Finance Ministry for a variety of actions that impede fair access to Japan's insurance markets--not only in the third sector but in the primary sectors as well--and concluded that the 30-month clock for deregulation should not begin until Japan corrects many of the problems blocking market access and giving Japanese firms unfair access to U.S.-dominated market segments.

After a year of economic convulsions in Asia--caused in no small measure by government bureaucrats distorting markets in favor of key industries--one might hope that the bureaucrats would finally do what is healthy and in the best interests of the Japanese public. But still they resist. Every successful Japan-U.S. trade agreement has produced massive growth in Japan's market. Just look at semiconductors and cellular phones.

At some point, this behavior becomes comically predictable. Recently, the U.S. Federal Reserve Bank intervened in global currency markets to try and stem the collapse of the yen.

The Finance Ministry needed this favor, which could be best reciprocated if these same officials would stop trying to manipulate economic outcomes and learn to have faith in the market.

To correct this mess, these officials need to get the Japanese firms out of the third sector, get all the players back to the starting line and reset the clock. Then, market forces, not government technocrats, will determine the winners and losers in a fair race.

Japan needs to purge the mercantilist tendencies from its system--or, as Clinton has demonstrated during his trip to China--get used to the fact that the United States has other options and may begin to consider Japan more trouble than it is worth.