George Friedman, an expert on international affairs and intelligence, recently compared the internal forces of the Japanese economy to the tectonic plates that make up the earth's crust.

These plates move very little for long periods, in spite of monumental pressures on them. When they finally do move, an earthquake results. Similarly, warns Friedman on his Strategic Forecasting Web site, the relatively stable Japanese economy is subject to "a sudden rendering [that] turns everything upside down."

Japan's finance minister told the country's parliament on March 9, "Japan's fiscal condition is approaching a state of collapse." Because Japan's deficit is already huge, the government has few options that it can exercise. Unemployment has risen to 4.9 percent-a high figure for Japan.

Mitsubishi Motors Corporation is projected to lose $2.1 billion this fiscal year, a projection 79 percent worse than what Mitsubishi offered just last November. Mazda, another Japanese car manufacturer, recently announced that it will shift its compact-car production from Japan to a Ford plant in Spain. Japanese stocks have plunged to a 15-year low, representing a 67 percent decline from their high in 1990.

How significant is the Japanese economy? It's the second largest in the world. Economic columnist Mort Zuckerman puts it into perspective: "A financial disaster of the size implicit in their latest numbers would send huge waves everywhere. Japan is the largest economy in Asia. The spending power of its 127 million residents exceeds that of the 1.8 billion inhabitants of East and Southeast Asia. It is also the world's largest gross and net international lender, with over $2.5 trillion outstanding" ("Japan on the Brink," March 15, 2001). Clearly its financial troubles have the ability to disrupt global financial markets.

Dr. Friedman warns, "Japan's economy is so close to the edge it will not take much to nudge it over." He made the comment in the context of an editorial about why U.S. Federal Reserve Chairman Alan Greenspan is concerned about reducing U.S. interest rates too rapidly. The world's largest economy and the world's second-largest economy are inextricably linked. Lower interest rates in the United States stimulate its domestic economy at the same time as they weaken the U.S. dollar abroad. Fewer Japanese products would be imported into the United States because they would be more expensive. Fewer Japanese products would be sold in Europe because American exports would be more competitive than the Japanese ones. These market fluctuations occur all the time, but Friedman says, "a drop in cash flow due to declining exports could be the straw that breaks the camel's back."

Sources: Times Newspapers Ltd., Strategic Forecasting LLC, CNN, Reuters.