Commentary: Nag, Nag, Nag. What Else Can Bob Rubin Do?

What's a Treasury Secretary to do? Robert E. Rubin has all but begged Japan to clean up its troubled banking system and stimulate its economy with tax cuts. Most recently, he warned on July 7 that Japanese officials must enact "strong and sustained fiscal stimulus" to "get out of the morass that they've been in." In June, against his initial instincts, he even helped engineer a massive purchase of yen to halt its slide.

Most likely, Japan will continue to resist U.S. pressure to take the politically painful steps needed to nurse its economy back to health. But Rubin can't simply walk away: The risks of doing nothing are too grave for the global economy. Rubin has to look for every opportunity to keep the heat on.

"SCARY." But Rubin has a dilemma. When he dealt with currency crises in Mexico and in Asia's tiger economies, he could extract economic reforms in return for U.S. and International Monetary Fund assistance. Despite the enormous risk a shaky Japan poses to the global economy, though, the U.S. Treasury is largely powerless with Tokyo. A weak Japan still has more of a hold on the U.S. economy than the surging American economy has on Japan. Japanese investors fund the U.S. current-account deficit with their holdings of some $300 billion in Treasury securities. "The influence the rest of the world has over Japan is fairly limited," admits Marcus Noland, a scholar at the Institute for International Economics. "This is bothersome and scary."

Perhaps nothing illustrates this point better than the events of the last few weeks. By giving in to Japanese pressure to join in the yen rescue mission on June 17, Rubin bought enough goodwill to press Tokyo to go ahead with a plan to close insolvent banks. The Japanese, with great fanfare, pledged to create a new "bridge bank" that would take over smaller institutions. But Japanese officials are committing only a sliver of the $530 billion or more needed for the cleanup. What's more, they have all but signaled that the 19 largest, most powerful banks are protected. That has helped drive the yen back close to its level when Rubin intervened to prop it up.

What else can be done? Massachusetts Institute of Technology economist Paul R. Krugman says Rubin needs to press the Japanese to take bolder steps, such as calling on Japan's central bank to use an inflationary monetary policy to get Japan's economy going. But U.S. Treasury officials fear that approach might trigger a new run on the yen. On the other hand, trade hawks such as Clyde V. Prestowitz Jr., president of the Economic Strategy Institute, want the World Trade Organization to threaten trade sanctions so the Japanese don't try to export their way out of trouble. That would get Tokyo's attention--and help prevent further devaluations by other Asian nations--but it would risk a global trade war.

The U.S. shouldn't be surprised that Japan resists its calls for reform. A decade ago, the two countries' roles were reversed: A powerful Japan kept nagging the U.S. to cut its budget and trade deficits to stop the dollar from sinking--to no avail. Indeed, it took years for the U.S. to muster the political will to tackle its problems.

By the same token, Japan wouldn't have undertaken even modest reforms now without unrelenting prodding from the U.S. In the end, Rubin's persistent nagging may get Japan to do the right thing.