Prime Minister Kiichi Miyazawa and Bank of Japan Governor Yasushi Mieno may have thought they were instilling confidence in a Japan facing its first major recession since 1975. But Miyazawa's $37 billion economic stimulus plan, unveiled on Mar. 31, and Mieno's three-quarter-point discount-rate cut a day later have elicited a rousing chorus of boos. On the Tokyo Stock Exchange alone, prices sagged nearly 6% (chart). "The economic package was a wet rag," snapped Jason C. James, market strategist at James Capel Pacific Ltd.

That assessment has troubling implications--and not just for Japan. Unless Miyazawa and Mieno come up with a more aggressive economic strategy soon, the stock market is almost sure to erode even further. An additional drop of 20%, says Eric Elstob, vice-chairman of London's Foreign & Colonial Management Ltd., could prompt big banks to call some of the hundreds of billions in loans they have extended around the world. The banks have as much as $150 billion in nonperforming assets domestically and abroad. Write-offs of that scale would wipe out much of their equity.

But even if all the losses are not taken, the banks are running short of one category of capital. They are allowed to count as capital part of any unrealized gains on their vast holdings of corporate shares. But the market's 50%-plus decline since 1989 has already wiped out most of these profits. As a result, the $450 billion Sakura Bank Ltd. and several others now fail to meet the internationally agreed-upon 8% capital-to-assets ratio set to take effect next year.

Even worse, Japan's ambivalent stand risks leaving Tokyo the odd man out in the global economy. The Federal Reserve and the Bush Administration, trying to pull the U.S. out of recession, and the Germans, spending heavily on reunification, are likely to bridle at any hint that they should help pump up Japanese demand as well. Yet in effect, that is what's happening. Even though it risks sparking new trade tensions, Japan appears to be trying to export its wayout of recession, much as it has done before.

As the economy has cooled over the past year, Japanese imports have fallen 15%. But the country is now running $10 billion-a-month trade surpluses as manufacturers look to foreign consumers to relieve bulging inventories and keep production up at hundreds of factories built during the easy-money 1980s. "Companies are trying to push their products offshore," says Long-Term Credit Bank of Japan Ltd. economist Nobuyuki Ueda. But the move is coming just as Japan's trading partners are urging Tokyo to buy more of their goods. European business leaders are seeking greater access to 12 markets, including pharmaceuticals and telecommunications.

Japan has risen to the economic challenge before. Two months into fiscal 1987, Prime Minister Yasuhiro Nakasone came up with $44.4 billion in extra spending to pull Japan out of a downturn caused by endaka, the soaring value of the yen. Miyazawa's current scheme is hardly as bold. It seeks to boost spending on utilities, among other areas. But for the most part, it moves up only outlays that are already scheduled for the fiscal year that began Apr. 1. As a result, business leaders and legislators are now urging Miyazawa to announce a second program, highlighting public works spending and also worth $37 billion. That could boost economic growth from a standstill to 2.4% this year, estimates Salomon Brothers Asia Ltd. economist Robert A. Feldman. Many expect such a plan in a few months, if only to help keep Miyazawa's scandal-plagued Liberal Democrats from losing seats in July's upper-house elections.

CHANGE OF MIND? Japan can increase spending. The Organization for Economic Cooperation & Development figures that Japan's budget is in surplus to the tune of 2% of GNP. Washington and Bonn are running deficits of 3% to 4% or more. With falling stock prices and the first real estate price drop in 17 years crimping household balance sheets, economists say the Bank of Japan could also do more to rekindle growth. Japan's discount rate remains well above the historic 2.5% low set in 1987, when the economy was nowhere near as sluggish as it is today. With unemployment only 2%, central banker Mieno sees no further rate cuts in sight. But many traders think he will change his mind.

To many economists, the current slowdown would be a propitious time for Miyazawa to launch more wide-ranging structural changes. Permitting rice imports and rezoning costly urban farmland would allow land prices to fall and badly needed houses and apartments to be built on former rice paddies. Lowering the 80% top personal income tax rate would also help. But those remedies will probably have to wait. For now, Miyazawa's No. 1 mission will be getting his country out of reverse--if not for Japan's sake, then for the sake of the struggling world economy.

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