Of Summers, Japan and Diet Coke

The new Treasury secretary may be a bit rowdy for Japanese diplomats, but his skepticism about structural reform will suit them just fine.
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TOKYO -- A gadfly and a pest, but an intellectual gadfly and pest. That's how many financial authorities in Japan view America's next

Treasury

secretary,

Lawrence Summers

. While his appointment to the top spot at Treasury will probably not generate a significant change in the content of U.S. economic policy toward Japan, it will certainly mean pricklier relations in terms of form.

Where the departing Robert Rubin won high marks in Tokyo for his elegant statesmanship, Summers' famously disheveled, pugnacious style has left his buttoned-down, nonconfrontational counterparts in Japan cold. Moreover, while Summers possesses an intellectual fascination with Japan, he's not particularly enthralled with the slow pace of change here.

During his first year in the Clinton Administration as undersecretary of the Treasury for international affairs, he visited Japan about half a dozen times. In the five years since, he's only traveled here on a handful of occasions. This is partly because he was elevated to deputy secretary in 1995 and became preoccupied with other problems, such as the U.S. response to the Mexican financial crisis of 1994 and 1995. But like so many newcomers with high expectations about the pace of change in Japan, Summers quickly grew discouraged with the country's hidebound bureaucrats who were not up to his intellectual standards.

In policy terms, Summers will likely continue to pressure Japan to spend its way out of recession. As one Tokyo insider put it, Summers is a card-carrying Keynesian "who is not afraid to prescribe digging deficit holes and filling them up again."

However, U.S. policy toward the world's second-largest economy may change slightly. One subtle shift that could occur under Summers derives from his skepticism over U.S. efforts to get Japan to undertake radical structural reform. Though he sees the value in restructuring Japan's rigid economy, it's a process that will take Japan too long to achieve, inflict undue pain in the short run, drive up unemployment, discourage consumption, chock off investment and ultimately delay recovery. That means he may not push Tokyo aggressively on deregulation, which is just fine with the Japanese.

As for monetary policy, like Rubin, Summers adheres to the belief that, if it's necessary for Japan to ditch its orthodox approach to monetary policy and start printing money, then so be it. That's one of the subtexts of Treasury's position that Japan must use all tools necessary to fix its economy.

What about currency policy? By chance, Japan's top financial diplomat

Eisuke Sakakibara

, known in the markets as "Mr. Yen," will be retiring from the

Ministry of Finance

in June, leading to some concern that the U.S. and Japan may encounter difficulties coordinating yen/dollar policy.

For much of the decade, Sakakibara and Summers were at the forefront of cutting deals on the exchange rate. It's true the two economists could pick up the phone and talk turkey about policy. Yet too much has been made of how their "close" personal relationship helped pave the way for smooth policy coordination. The

Hardy Boys

thing was largely a media invention. They did overlap a year at

Harvard

, but they never became the good buddies the media so often hyped.

The U.S. and Japan have always orchestrated currency policy based on national interests, not on the personal relationship of two men. This won't change with Summers at the helm of Treasury and Sakakibara out of the picture.

The Japanese largely believe that with Summers they are likely to get more continuity than change in U.S. policy. Still, Tokyo must be a little concerned by the fact that where Rubin had great access to

President Bill Clinton

, Summers isn't as wired into the White House. That may turn out to be a good thing for the finance mandarins over here, since Summers tends to be harsher on Japan. On the other hand, it may give an opening to hardliners in the Clinton administration, such as U.S. Trade Representative Charlene Barshefsky, to encourage the president to get tougher on Tokyo.

Although Japanese financial authorities don't have a particular fondness for Summers, at least they can take refuge in the fact that he's a known quantity -- the devil they know. They've learned to expect that when he walks into the room, his shirt may be untucked and his hair mussed up.

But if they're smart, they'll stock their vending machines with lots of

Diet Coke

, which is a little hard to come by in Japan. Summers guzzles the stuff like there's no tomorrow. If they can do this, the new Treasury chief might just come around to the idea that change in Japan is possible after all.

John F. Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute. He produces occasional commentary for TSC. He publishes an in-depth roundup of Japanese politics at his web

site. This column is exclusive to TheStreet.com.