FOREIGN CORRESPONDENT

NEW YORK - Junichiro Koizumi, Japan's stylish, high-personality new prime minister vows to revive his nation's economy and get the second richest nation on earth to start acting like a world power rather than an Asian Kuwait.

Not a moment too soon: Japan Inc desperately needs a revolution.

In the 1980's, Japan's government created a huge financial bubble by flooding the market with virtually free money. Land and share prices skyrocketed. When the government panicked in 1990 and shut off credit, the bubble burst. For the past decade, Japan has suffered through recession, stagnation, and a financial near-death experience.

In another incredible act of folly, the ruling Liberal Democratic Party (LDP) tried to spend Japan out of recession with borrowed money by building public infrastructure such as bridges, tunnels, and harbors.

The result was calamitous: festering economic illness and the world's biggest public debt at 120% of GDP, some 600 trillion yen. On top of this massive boondoggle, Japan's floundering financial institutions are believed to hold hidden bad debts on their books of at least 123 trillion yen, roughly US $1 trillion.

Koizumi plans to slash government spending to restore national finances and privatize government operations, notably the cash-rich post office where most Japanese keep their savings. He also vows to emulate US business culture by forcing heavily-indebted banks and firms to go bankrupt, ie the process economist Shumpeter termed the creative destruction of capitalism.

But this sensible, long-overdue policy will encounter two major roadblocks. First, the LDP gets its main financial support from farmers, banks, construction, and small shop keepers - the very sectors that stoutly resist reform.

Second, and even more important, Koizumi's efforts to import US-style business culture to Japan may not succeed. To understand why, think of Japan as a rice-growing village writ large. When harvests are good, all share in the bounty; when harvests fail, all share in hardship. Villagers work together under the guidance of an informal council of elders. Conformity, cooperation and consensus are encouraged; individuality is not.

A central feature of Japan's psychology is refusal to accept defeat. For Japan, not so long ago a courageous warrior nation, the samurai code of personal honor, public face, and clan loyalty remain important. In one of history's most remarkable events, Japan abandoned medieval feudalism in 1871 and transformed itself in a few decades into a modern industrial society. The samurai, Japan's warrior caste, put away their swords and went to work as government officials and, later, leaders of major corporations.

Japan's big companies became replicas of the old feudal clan structure, where the most prized virtues were loyalty, cooperation with other members, and placing the group above individual interests. Japanese workers were not employees; they were soldiers who served the clan and their lord for life; in return, they were given financial security, prestige, and a sense of belonging. Companies did not compete in the western sense: they did battle and formed temporary alliances, just like warring samurai armies during Japan's feudal age.

To Japanese corporate leaders, public admission of catastrophic business failures and firing large numbers of workers would be a profound disgrace. It is like telling villagers that in a year of a failing harvest, half will not eat. Any major housecleaning of Japan's bankrupt business and financial sectors must inevitably mean massive layoffs and a sharp increase in unemployment, perhaps as high as 7-8%, figures Japanese find horrifying.

Japanese do not surrender, either in war or in business. Who cannot feel awe when recalling the emaciated Japanese soldiers who kept defending their positions on remote Pacific islands for thirty years after war's end. Many of Japan's currently bankrupt business leaders insist they are not defeated until they admit defeat, which they won't.

Japan does not have a generous national pension system. Traditionally, when workers reached their mid to late 40's, they would be retired by big firms. These retirees would then take their severance packages and open up a mom and pop retail store or act as small wholesaler-distributors.

As a result, retail prices for goods were high and multi-layered distribution cumbersome. But Japan's mom and pop system provided dignified, worthwhile work for countless retirees who otherwise would have had to depend on the state. Better, Japanese said, pay an extra $5 dollars for a bottle of shampoo than pay even more into a government pension bureaucracy. This system is now under mortal threat from US-style big box discounters.

Japan now faces one of the biggest challenges since Commodore Perry and an American fleet arrived in isolated Japan in 1853 and forced it to open trade with the outside world. Japan must now deal with another `gaijin' invasion that threatens its traditions and social fabric.

In Japan, to fight against overwhelming odds is considered noble. Like the legendary samurai, Musachi, who excelled in battling at odds of six or eight to one, Prime Minister Koizumi has set out to do battle against an army of protected special interests and hostile neighbors who do not want to see Japan assume its rightful geopolitical role in Asia.

If Koizumi wins his battle to revive Japan's economy, the entire world will benefit. If he fails, global economic recovery will be in jeopardy.