-- by Christopher Anstey ----
WASHINGTON (AFX) - A new US-Japan framework for managing economic issues is unlikely to have much impact on deregulation and structural reform in Japan, after the failure of successive US administrations in similar endeavors, analysts said.
"Washington is going to be frustrated (with the lack of progress under the new initiative)," predicted Ed Lincoln, senior fellow and Japan expert at the Brookings Institution.
On Saturday, President George W Bush and Japanese Prime Minister Junichiro Koizumi unveiled a "US-Japan partnership for growth," which aims to promote growth through half a dozen different bilateral working groups.
The groups will address such issues as fiscal policy, trade relations, regulatory matters, and direct investment.
Analysts noted that the ultimate objective of the Bush administration -- promoting domestic demand led growth in Japan -- is the same as that pursued by successive administrations over the past two decades.
Their goals have been elusive, due to the immense political challenge of implementing reforms in Japan, and Bush's new approach is unlikely to have much impact, analysts concluded.
Bush administration officials criticised the Clinton administration's approach towards Japan as "lecturing" that ultimately undermined the bilateral relationship, while it failed to secure growth in Japan.
The new administration has foresworn lecturing, and instead seeks to impart "advice" to Japan, through the new bilateral dialogue mechanism, on how to implement fiscal reform and dispose of Japan's bad loans.
Asked whether the new approach would be more successful in promoting reform in Japan, Lincoln said "in a word, no." David DeRosa, adjunct professor of finance at the Yale School of Management, said the new mechanism would have "minimal" effect in promoting Koizumi's reform effort.
"It's got to come from inside Japan," DeRosa said. Lincoln cautioned that the Bush administration "will be tested within the next year, because the Japanese economy is not heading in the right direction, and it is unlikely that the reforms are going to be implemented (quickly) or will have the desired impact."
Market analysts saw little of interest in the Bush-Koizumi meeting, although Bush's warm endorsement of Koizumi's reform program was interpreted as consistent with the idea that the Bush administration will sanction a weaker yen if it is the result of domestic policy reforms.
"I strongly support the prime minister's reform agenda for the economy of Japan," Bush said Saturday, adding that "I have no reservations about the ... agenda that the Prime Minister is advancing."
Brown Brothers Harriman economists said, "The warm tone of the meeting is a positive, probably boosting the chances that US officials will reiterate their willingness to accept a weak yen," in a research note.
Jeremy Fand, global head of foreign exchange strategy at UBS Warburg, said "The lack of any language (to the contrary) left (intact) the market's impression of the Bush administration sanctioning a weak yen."
"My impression is (the summit was) generally supportive of a stronger dollar/yen," Fand said. Analysts said the warm Bush endorsement of Koizumi's plans, even leaving out prodding Japan on timely implementation, is a sign that the new administration has placed security ties as the priority in the bilateral relationship.
The Clinton administration aggressively shifted attention to bilateral trade and economic issues with Japan when it came to office in 1993, analysts noted.
This approach was deemed better suited to a post Cold War environment, in which the strategic importance of Japan as a security ally was less important, particularly at a time of US economic weakness and large trade deficits.
Although the US still has enormous trade deficits, and is currently in a period of pronounced economic weakness, the Bush administration's foreign and security policies require a strong relationship with Japan, analysts said.
Bush's proposed national and theater missile defense systems, along with a redefinition of the US-China relationship away from having China as a "strategic partner" have brought security issues to the forefront.
As a result, the Bush administration "came in with a plan to make Japan as the central axis of Asia policy," DeRosa said.
China's attempt to "humiliate the Bush administration with the spy plane incident" has also played a role in raising the importance of security ties, he added.
Koizumi's own leanings towards expanding the operational capacity of Japan's military -- something the US has sought for some years -- is another factor, analysts said.
This means the Bush administration is likely to be accommodating towards Japan on the economic side, anlaysts concluded. "I think we're back into an environment in which security dominates (the relationship," Lincoln said.
However, this scenario may be disrupted if the US continues to endure a soft economy, and trade tensions begin to rise. "Trade has been somewhat of a backburner subject," said Jay Bryson, global economist at First Union Corp, but if US unempolyment rates rise with the economic slowdown, "trade issues could move to the front burner (again)."