The New York stock market remains volatile, even after rebounding from its worst-ever decline in points that was posted April 14. Following the crash, the Tokyo stock market also nosedived; it is troubled by even more jitters than Wall Street. Some analysts say the recent replacement of some of the stocks linked to the Nikkei average, the leading market gauge, is responsible for the instability in Tokyo; in fact, however, it stems from the nagging uncertainty over Japan’s economic future.

Until it crashed, Wall Street had experienced an excessive boom, that involved mostly technology stocks. Adjustment was imminent. Since June 1999, the Fed has raised interest rates five times. On the stock market, high-tech stocks have remained unaffected by higher interest rates, although traditional blue-chip shares have fallen.

The recent adjustment was inevitable — and desirable. The U.S. economy is still basically healthy, with the unemployment rate remaining low in the 4-5 percent range. Industrial productivity is high and prices are stable. The “New Economy” continues to prosper, despite a growing U.S. trade deficit. There are no signs that capital inflows from Japan have started flowing back.

The Japanese stock market has also been overheated, because of excessive anticipation about high-tech shares on Nasdaq Japan and the Mothers section and over economic recovery that is expected to start later in the fiscal year.

To be sure, capital spending, especially information-technology-related investment, and housing investment have made strong gains since early this year. Banks have improved their financial positions, thanks in part to the stock-market boom. Consumer spending, however, remains sluggish and the unemployment rate is high. Companies are likely to continue pushing restructuring efforts and the job shortage is expected to remain severe for some time.

The Bank of Japan is in no position to change its de facto zero-interest rate policy, and the yen’s value is unlikely to rise anytime soon. The fact that there is little prospect for higher domestic interest rates could give lawmakers an excuse for delaying fiscal reforms. At the same time, lack of anxiety over a rise in the yen’s foreign-exchange value could boost an export drive to make up for slow recovery in domestic demand. These developments would leave serious problems for the future.

The recent change of government — Yoshiro Mori’s takeover as prime minister from ailing Keizo Obuchi — did not have much effect on the stock market, since no drastic policy changes were expected. Furthermore, the three-party ruling coalition that is led by the Liberal Democratic Party will not not suffer a serious setback in the general election that is expected to be held before Japan hosts a Group of Eight summit in July. The alliance was likely to take advantage of voters’ sympathy for Obuchi, who suffered a stroke while in office.

Aside from the election, the Japanese government must soon come up with blueprints for drastic economic and fiscal structure reforms to promote long-term economic recovery, amid widespread concern among the public and investors over the nation’s economic future.

There is not much significance to predictions about Japan’s growth rate in fiscal 2000 — for example, whether it will hit 1 percent or exceed 2 percent. More importantly, policymakers should understand what is happening and what will be happening in the Japanese economy.

Like their U.S. counterparts, Japanese industries and companies are becoming divided between winners and losers in the market. In the years ahead, losers will be forced out of the market. Otherwise, economic structure reforms will not progress.

However, Japanese winners are unlikely to take over the market in a sweep as U.S. winners did in the 1990s. Losers are likely to try desperately to foster new businesses, while disposing of debts. Winners and losers will coexist. Economic recovery will take time. If losers are protected and preserved, structural reform will be delayed.

In this Internet era, end-product prices should not rise even if terms of trade deteriorate. Companies will be unable to survive unless they improve productivity, reduce labor costs and increase spending on information technology and high-tech equipment. Companies will turn increasingly to direct financing by issuing stocks and bonds and by cutting loans from banks. The less bank loans companies have, the more they will increase productivity. Indirect financing from banks will decrease, and the number of banks will decrease. Companies dependent on bank loans could become losers.

The financing services of major manufacturers such as Toyota Motor and Sony can better serve corporate Japan than investment-bank services of megabanks established through the mergers of major banks, because manufacturers have more information in their own technical fields.

Safety nets are needed, but infusing public funds into industries or companies that should be driven from the market would retard economic revival. Lawmakers should develop a comprehensive, dynamic policy system that will encourage companies to work hard and innovate so that they will not become losers. At the same, they cannot thwart winners who have succeeded on their own. Regrettably, Japan has no leaders who have deep insight and strong decision-making power for establishing this system.

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