HITTING ROCK BOTTOM

By Daniel Kadlec

The U.S. has certainly had a hard time cracking the Japanese market, which doesn't seem to want our cars, computers, film or steel. Don't even mention rice. But last week we finally found something the Japanese truly need: made-in-the-U.S.A. management style. It's the brutally honest kind, which has littered boardrooms with the carcasses of middle managers--and incidentally, enabled us to thrive in a viciously competitive global economy. Europeans are now buying it by the caseload, but Japan has been a country in denial. Its tattered stock market and eight-year malaise have left this once feared economy in desperate need of action.

Then last week Japan tried the unthinkable: regulators let a prominent yet insolvent bank, Hokkaido Takushoku, go bust. Instead of a panic, Japan's Western-style measure elicited a Western-style response: stocks surged 11% in two days. Imagine the rally if they had killed a bigger bank. Investors in the U.S. aren't strangers to the perversity of free markets. How many times have you seen a company so down that it says it must shed thousands of jobs, and the stock zooms? So ingrained is this convoluted logic that the mere appointment of a CEO known for tough love can send a stock flying. Sunbeam surged 49% on the day cost-cutting Al ("Chainsaw") Dunlap became CEO. Japan should name him Minister of Finance; the rally would dazzle.

Markets like to see management, or government, openly recognize problems. That's the vital first step toward fixing them. In Japan, last week's bank failure was the catharsis that investors wanted, and the market's swift approval is certain to encourage more bold acts. Indeed, the ink hadn't dried on this page when giant Yamaichi Securities said it too would liquidate--and regulators pledged cash to protect the firm's clients. Japan's financial system has some $500 billion of uncollectible debt--reminiscent of the savings-and-loan mess in the U.S. a decade ago. America's taxpayer-financed bailout was painful, costing more than $300 billion. But once lenders were healthy again, they sowed seeds for today's miracle economy. Until Japan goes through something like that, it won't get much of a recovery.

Is it finally time to invest in Japan? There's virtually no growth. Bank lending is contracting, and jobs are scarce. The greater Asia slowdown promises to deepen Japan's woes. "This is a catastrophe," says Carl Weinberg at High Frequency Economics. At a conference with senior Japanese executives, notes Allen Sinai of Primark Decision Economics, "I was absolutely flabbergasted by the pessimism." Picking market bottoms is never easy. When they occur, pessimism and words like catastrophe are usually in evidence, as is some element of resolve. It's all there in Japan today. The question isn't whether things will get worse but whether the worst is priced into the market. Mutual funds that invest in Japan have been appropriately whacked. But they will recover long before the economy. That's the nature of stocks. This may not be the bottom. But if you've got five years, you'll do fine by starting to invest in Japan today.

Daniel Kadlec is TIME's Wall Street columnist. Reach him at kadlec@time.com