Does Clinton Have Japan's Number...

President Bill Clinton broke ground on Feb. 11 by admitting that the U.S. and Japan had failed to reach even a minimal, face-saving trade agreement after seven months of intensive negotiations. The breakdown in the talks briefly rattled currency markets and raised the specter of a trade war. But the stalemate may do something that decades of forced smiles and phony deals didn't do: shock Japan into meaningful reform. "Clinton had to start with an out-and-out failure," says a former top Bush Administration trade official. "If he had tried to paper this one over, he would be writing off any progress during his Administration."

It will take tough action to get Japan off the mark. Despite its reformist reputation, the government of Japanese Prime Minister Morihiro Hoso-kawa is still hewing faithfully to Japan's post-World War II strategy: export as many high-tech goods as possible, exclude foreign competitors and investors from the home market, and shift the subsequent higher prices onto Japanese consumers. The result: Manufactured imports account for only about 6% of the Japanese market, vs. 15% in the U.S. and Germany. Such a mercantilist system is no longer tolerable now that Japan's economy is the world's second most powerful.

MORE PRESSURE. Where should Clinton go from here? The White House should champion industries where the U.S. is highly competitive worldwide but has been held to an artificially low market share in Japan. Focused pressure to crack open markets for U.S. glass, supercomputer, and satellite makers has worked in the past. In the most dramatic case, Japanese electronics companies finally allowed foreign manufacturers to capture more than 20% of its semiconductor market last year. That approach should be expanded to pharmaceuticals, medical instruments, telecommunications, and insurance--in short, to any sector where the U.S. is competitive in Europe but shut out in Japan.

Still, even such targeted pressure won't do much to turn around Japan's $130 billion current-account surplus with its trading partners. For that, the U.S. will have to demand reforms in Japan's creaky distribution system, which makes it expensive and difficult for foreigners to sell there. Other prime targets: Japan's largely closed financial markets and its ludicrously inadequate antitrust enforcement. Clinton's leverage can come from threats of U.S. antitrust enforcement against Japanese multinationals located within the U.S. Japanese transplants and their keiretsu relatives in Japan want to avoid scrutiny and questions about price fixing and tax shenanigans. They can help supply the necessary pressure on the home office.

Then there's the yen. When the U.S. agreed last August to cap the yen's value against the dollar, it took some of the pressure off of Japan to reform. "If the Administration chooses not to cooperate again in holding down the yen, that would be a way of sending a very clear signal," says I.M. Destler, a University of Maryland economist. Japanese manufacturers fear a strengthening yen will eventually drive up prices and make them uncompetitive.

Clinton also can prod Japan to become less insular. Japan "doesn't want to be dependent on foreign parts and supplies," says Stephen D. Cohen, an American University expert on Japan. To change that attitude, the U.S. can impose reciprocity if Japan continues to discriminate against imports. Already, the Administration backs the idea of a "fair trade in financial services" bill that would restrict foreign banks and brokerages if U.S. firms face restrictions in their home countries.

Japanese promises to open markets should lead to measurable results, which is basically what the U.S. is now demanding. Progress is more likely now that the two sides have stopped papering over their differences. Clinton should stick to his guns.

Before it's here, it's on the Bloomberg Terminal.