Japan can do more

Japan is officially in recession, and its government continues to dawdle about responding. The risk is that Japan's problems may cause further damage to its already weak Asian neighbors.

The first priority for Japanese officials must be to save the country's sick banking system, which is still burdened by bad loans left over from the bubble economy of the late 1980s. In February the government announced a large and badly needed bank bailout plan, but almost nothing has been done to institute it. The government needs to close weak institutions while enabling the stronger ones to put their bad loans behind them. The scandal at the Ministry of Finance, which some had hoped would make reform easier, instead seems to have produced paralysis.

The banks, belatedly awake to how bad their situation is, have created a huge credit crunch by cutting back on loans to avert further losses. Worried consumers are reluctant to spend, making things worse. Money is flowing out of the country as savers seek safe havens in foreign banks and foreign bonds. So despite a big trade surplus the yen is tumbling, down 21 percent against the dollar in the past 12 months.

Japan's current economic woes reflect the limits of national monetary policy in moving an economy, particularly in this age of global financing flows. Japan's central bank has pushed interest rates about as low as they can possibly go. Short-term rates are under 1 percent and the yield on 10-year Japanese government bonds has fallen to 1.3 percent. It is hard to imagine how credit could be cheaper.

But the banks are afraid to make loans, and much of the borrowing has been by foreigners, who have used the cheap funds to speculate in foreign securities markets. Japan's low rates have stimulated rising stock and bond prices in the United States but have done nothing for its own economy.

The Japanese government has put together a fiscal stimulus package, which should help. But more needs to be done to allow Japan to play the needed role of locomotive for the rest of Asia. Right now, Japan is acting as just one more brake on an already stalled regional economy.

-- The New York Times