LONDON -- Reports from Tokyo suggest that Japanese government and business leaders have not properly thought through economic policies designed to ensure recovery. Each problem seems to be treated in isolation, and decisions appear to be taken on the basis of what is most likely to satisfy the various pressure groups that fund the Liberal Democratic Party.

When Shinsei Bank (formerly the Long Term Credit Bank) was set up, it was permitted to return to the government loans that had lost over 20 percent of their value. When this provision was written into the terms of sale, the authorities seemed to think that the new management would be as amenable to persuasion as other Japanese banks. If only to demonstrate that they were a Japanese bank despite their foreign ownership, they would surely be willing to forgive the debts of companies with important links to the government. But when the Sogo Department Store group asked the banks to forgive a large amount of debt, Shinsei refused and made use of the provisions in their purchase agreement. At first, the government decided that Sogo should not be allowed to go bankrupt and was prepared to use taxpayers' money to bail it out. The public outcry against such misuse of money forced a rethink.

Now it is hoped that a merger between Sogo and Seibu will save the bulk of the business. It is hard to see how this can be accomplished, given that Seibu also has huge debts. Why should it be easier for two companies with financial problems to recover than for each separately? The only way for both to recover is by massive restructuring that will entail closing many stores and cutting many jobs. Will they have the courage to pursue such a radical policy or will they try to postpone the inevitable?