The United States and Japan face immediate challenges with major implications for the global economy. Japan needs to overcome the consequences of its burst financial bubble, while the United States must prevent financial bubbling from ending its long economic expansion.

It may be too late, but the Federal Reserve should dampen speculation that history shows tends to end in financial crisis. Holland's 17th century tulip bubble, known as tulipomania, saw single bulbs sell for several thousand dollars apiece before the government intervened. England saw frenzied investment in the South Sea Co., until it failed disastrously in 1720. The same year in France, the Mississippi Bubble inflated when banker John Law touted Louisiana's gold- and silver-filled mountains. While a few speculators made a killing, most were ruined.Last week, Hong Kong Association of Banks Chairman Mervyn Davies warned that the overheated Dow Jones industrial average seriously threatened Asian stability. While Japan remains the biggest regional concern, some believe the Dow's recent decline initiates the long-awaited U.S. correction. Similar speculative conditions may also exist in Europe.

U.S. economist Henry Kaufman said in Tokyo last week danger signs are mounting. The price/earnings ratio of S&P 500 stocks approaches 30 to 1, while all Dow stocks have seen a 140 percent return over the past five years, including 13 percent in first quarter 1988 alone. This was surpassed only once - from 1924 to 1928 - when stocks soared 214 percent.

Even the sharp 131 percent rise after the 1929 crash, from 1933 through 1937, doesn't match recent gains. Particularly sobering, Mr. Kaufman said, is that dramatic market setbacks followed each earlier run-up. ''America's challenge now is to deal with the bubble before some unforeseen development pierces it and sets off a contagion of plummeting asset values that will gravely threaten global economic and financial stability,'' he said.

A sudden implosion could cause a global recession. Japan's effort to overcome its burst 1980s financial bubble has been tortuous and frustrating. Japan tried again last week to end its seven-year slump with a record $128 billion economic stimulus program. Most analysts say the plan may halt further decline but won't jump-start the economy.

Until Japan's financial institutions are rehabilitated, they cannot revitalize growth or help create credit. Tokyo must repair its ailing financial system. While financial deregulation is needed, it is not enough. The Big Three Japanese securities firms - Nomura, Daiwa, and Nikko - face huge challenges adapting to the changing marketplace, Moody's Investors Service said in a report this week, with most second-tier players completely unprepared.

The deteriorating domestic economy, profit pressures and Japan's weak stomach for deregulation will probably force second-tier players out of the market altogether and force the Big Three to restructure, Moody's said. That said, industry sectors like asset management and debt issuance should benefit from ongoing deregulation.

Restoring Japanese financial health is essential. Japan, like all industrial societies, needs willing lenders and investors, not just fiscal expansion, to reignite economic growth, Mr. Kaufman warns. Tokyo must create a market in asset-backed securities, taking a cue from the 1980s U.S. savings and loan crisis, to ease its debt overhang.

The problem for the United States, meanwhile, is an asymmetrical monetary policy, Mr. Kaufman says. While few support Fed pre-emptive tightening to dampen speculation, just knowing the central bank will likely ease policy if the stock market crashes gives investors false confidence. The Fed needs to consider the fluctuating value of financial assets - stocks and real estate - in crafting monetary policy. Effectively, the Fed is being asked to remove the punch bowl just as the party peaks, while Japan desperately seeks a party. Both nations must tend their bubbles for the sake of the global economy.

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