JAPANESE SISYPHUS

JAPANESE SISYPHUS

ust when it seemed Japan would finally crest the hill and get its economy growing again, it has rolled back into recession. It's the modern Japanese version of the old Greek Sisyphus myth.

Japan's chief economic planner, Taichi Sakaiya, said that the economy likely shrank during the October-December quarter, the second quarter in a row of negative growth, which constitutes a technical recession.While the news was not completely unexpected, it was bracing enough to knock the yen off its lofty pedestal - something the Bank of Japan was seemingly unable to do despite record amounts of intervention in the currency markets.

The dollar soared this week to a five-month high against the yen on worries about whether Japan's economy will ever come back to life. Some analysts even suggested that now is the time for the Japanese authorities to intervene when the market trend is going in the same direction. Kick the yen while it is down, they urged.

But intervention is not the answer. Fundamental structural changes are urgently required, and that's not going to be easy. Japan has far to go. The transition to a self-sustaining recovery will be all the more difficult because its fiscal policy is ceasing to serve as a tailwind and shifting into a headwind, Lehman Brothers pointed out in a recent report.

Public investment, the extension of public-sector loans at modest interest rates, and government credit guarantees must soon be scaled back. While Japanese policymakers will no doubt be wary of repeating the 1997 mistake of premature withdrawal of fiscal stimulus, the reality is that they have increasingly little room to maneuver, Lehman Brothers said. The budgetary adjustment cannot be put off much longer.

Japan's gross general-government indebtedness will account for the highest proportion of gross domestic product in the industrial world, at around 130 percent, by the end of next year. The only other developed country to experience anything close to this in recent memory was Italy in the 1990s, and its growth performance during this period was similar to Japan's, analysts point out.

It is not time to give up hope, however. Despite the latest setback, the Japanese economy is expected to do better in the current quarter. More importantly, Japan seems to be serious about making some radical economic and social reforms.

The recovery likely will remain fragile and uneven, and the Bank of Japan certainly needs to extend its zero-interest-rate policy. Economists believe the latest round of fiscal stimulus will spark another surge in activity in the spring. Translating this into a self-sustaining recovery will require much more, however.

The main constraint on private-sector domestic demand is corporate restructuring. The process needs to be accelerated, nonetheless, in order to create expectations of future growth. To boost productivity, Japanese companies need to embrace information technology, and the government must speed up the regulatory transition to a market-led model.

Japan is trying to foster an entrepreneurial spirit and is encouraging the nation's students to learn English so they can be more proficient on the Internet. Measures are being taken to promote the development of high-speed and high-volume information and communication networks.

Lehman Brothers said in its report that much more could be done to provide an appropriate framework for change by reducing entry restrictions to cutting-edge industries and introducing measures that encourage the process of resource reallocation to the ''new economy.''

Economists warn that the Japanese economy could suffer an extended period of negative cyclical feedback from structural adjustment. But the process has to be sufficiently comprehensive to deliver the necessary transformation of the private sector. There is no turning back.

The global economy is improving, however. Japan should benefit from the strong economic recovery in Asia, as well as growth in Europe and the United States. Meanwhile, it needs to walk faster along the path of structural reform. It is making efforts to promote small and medium enterprises and start-up businesses. A gradual trend toward meritocracy in wages and diversified recruitment is changing working practices. Lifetime employment is no longer guaranteed.

The changes must be jarring, particularly on an aging population. In the end, however, the adjustments will result in a stronger economy and better living standards for the Japanese people.