ABSTRACT
If Japan is to reform, increased globalization will have to play a critical role. Without increased globalization, it is hard to see how reform can succeed, either economically or politically. Increased trade and foreign direct investment were critical in the successful transitions to market economies in Poland, China, and now India. It is not that globalization is more important than domestic reforms. Rather, domestic reform is more likely to occur if Japan experiences more globalization. Financial integration is critical because it increases the odds that money will be allocated according to its most efficient use, not outdated ties. Some in Japan resist globalization, pointing to the Asian calamity of 1997-98. Guided by the premise that bringing back international investors was the key to restoring growth, the IMF insisted on raising interest rates in a recession—the exact opposite of what any central bank does in a rich country.
