Can Japan sort out this mess? At first sight, the task looks more manageable than Germany Japan's problems are concentrated in the financial sector whereas Germany's span the entire willing to undertake large-scale financial refom ogress e of urgency, nor does it have a clear economy. But unlike Germany, Japan is showing no sens reform agenda. There have been some signs of pr particularly the governments recent bail-out and restructuring of Resona bank. But there is still little evidence that policymakers are A number of outside observers have concluded that Japan must be forced to undertake structural reform by letting its currency appreciate substantially. They argue that during the second half of the 1990s the weakening of the yen allowed Japan to put off structural reform, and that now the government is deliberately putting it off further through its currency intervention. A much stronger yen would bring about the much-needed structural reform, at the same time as helping to reduce the american current-account deficit. A little arm-twisting Fred Bergsten head of the ile, is one of the most vocal proponents of this thesis. In a recent testimony to Congress he said America should tell the Japanese to stop intervening to keep down the yen. If necessary the administration should threaten to sell dollars to offset the Japanese efforts. However, many economists disagree with Mr Bergsten, arguing that the ighter macroeconomic environment created by a sharply raised exchange rate would aggravate deflation and make the banking reform unnecessarily painful. Even John Snow, America's Treasury secretary and the man ultimately responsible for any currency intervention acknowledged that Japan's desire to stop its currency appreciating is understandable."They need a strong export sector to get their reforms done he said this summer. More important the process of reflation -crucial to getting Japan out of its mess-is likely to mean a weaker rather than a stronger currency at least in the short term there is a growing consensus among Japan-watchers, led most recently by Ben Bernanke, a governor of America's Federal Reserve and a renowned monetary economist, that an ambitious combination of fiscal and monetary easing, coupled with a clear inflation target, would jolt Japan out of its financed by the purchase of government bonds by the Bank of bap.n favour of big tax cuts This might prove the surest route to boosting Japanese demand but it is unlikely to strengthen the yen, at least in the short term. And even as it got the Japanese economy going again, thus helping to reduce the worlds over-dependence on America, it would aggravate another problem which adds to that dependence: the extreme reluctance of most of America's Asian trading partners to let their currencies appreciate Copyright C 2004 The Economist Newspaper and The Economist Group. All rights reservedCan Japan sort out this mess? At first sight, the task looks more manageable than Germany's. Japan's problems are concentrated in the financial sector, whereas Germany's span the entire economy. But unlike Germany, Japan is showing no sense of urgency, nor does it have a clear reform agenda. There have been some signs of progress, particularly the government's recent bail-out and restructuring of Resona bank. But there is still little evidence that policymakers are willing to undertake large-scale financial reform. A number of outside observers have concluded that Japan must be forced to undertake structural reform by letting its currency appreciate substantially. They argue that during the second half of the 1990s the weakening of the yen allowed Japan to put off structural reform, and that now the government is deliberately putting it off further through its currency intervention. A much stronger yen would bring about the much-needed structural reform, at the same time as helping to reduce the American current-account deficit. A little arm-twisting Fred Bergsten, head of the IIE, is one of the most vocal proponents of this thesis. In a recent testimony to Congress he said America should tell the Japanese to stop intervening to keep down the yen. If necessary, the administration should threaten to sell dollars to offset the Japanese efforts. However, many economists disagree with Mr Bergsten, arguing that the tighter macroeconomic environment created by a sharply raised exchange rate would aggravate deflation and make the banking reform unnecessarily painful. Even John Snow, America's Treasury secretary and the man ultimately responsible for any currency intervention, acknowledged that Japan's desire to stop its currency appreciating is understandable. “They need a strong export sector to get their reforms done,” he said this summer. More important, the process of reflation—crucial to getting Japan out of its mess—is likely to mean a weaker rather than a stronger currency, at least in the short term. There is a growing consensus among Japan-watchers, led most recently by Ben Bernanke, a governor of America's Federal Reserve and a renowned monetary economist, that an ambitious combination of fiscal and monetary easing, coupled with a clear inflation target, would jolt Japan out of its deflationary spiral. In a recent speech in Tokyo, Mr Bernanke argued in favour of big tax cuts financed by the purchase of government bonds by the Bank of Japan. This might prove the surest route to boosting Japanese demand, but it is unlikely to strengthen the yen, at least in the short term. And even as it got the Japanese economy going again, thus helping to reduce the world's over-dependence on America, it would aggravate another problem which adds to that dependence: the extreme reluctance of most of America's Asian trading partners to let their currencies appreciate. Copyright © 2004 The Economist Newspaper and The Economist Group. All rights reserved