Asia may be the economic region of the future, but its two major countries -- China and Japan -- are not without serious problems at the moment. Japan is in a period of economic stagnation that is verging on deflation. China is in a period of strong economic growth, but one that is always under threat to be interrupted by financial instability.

Current conditions in both countries became clearer to me when I visited them recently. The trip to China was under the auspices of a U.S-government-related agency.

The purpose was to lead a small group of experts who participated in a conference with Chinese legislators, officials, and academics to discuss various aspects of the financial reform legislation that is being considered to reshape the economy and financial institutions.

Attitudes in Flux

As the conference proceeded, it became clear that while the need for reform of the financial system was well understood, attitudes about scope, pace, and authority over implementation were still in a state of flux.

The central bank was to be given a mandate for currency stability, but whether it would in practice have adequate authority and instruments of control was conjectural.

Privatization of the banking system was being prepared for. It was recognized that efforts would need to be made, one way or another, to keep such a system free from the burden of bad loans currently on the books of state institutions or from so-called policy loans that might have to be made in future to industries that are of national importance but whose profitability was questionable.

Regulation Issues

Nonetheless, it is hard to predict how such difficult issues will be resolved in practice, and no clear consensus seemed to be at hand. Nor was it clear how a private banking market, not to mention securities and real estate markets, would be regulated and administered -- whether closely or more liberally, and with what degree of objectivity.

The legal and regulatory framework needed for a stable, well-functioning, relatively free financial market is obviously still in its infancy, if not its prenatal state. But the struggle for authority and control is ongoing, and being pursued with a sense of urgency.

A political leadership transition in prospect, with all its attendant uncertainties, and there was concern that an adequate legal framework needed to be in place to help ensure that economic and financial reforms would stay on course.

Regional Differences

Nonetheless, it may well be a long time before China has a private financial system that can effectively mobilize domestic saving throughout the country and make sufficient credit available to industry, though certain of the rapidly industrializing areas could be in a better shape earlier.

In any event, with various regions of the country taking their own economic initiatives, coherent legal and regulatory reforms may lag behind the ongoing need for them.

Partly for these reasons, pressures on the central bank to create credit, and hence money, in a period of rapid growth will remain strong. Whether the central bank will have the stature, authority, instruments, and will to resist such pressures, which emanate mainly from its own politically potent regional banks, is an open question.

Stagnation in Japan

While China must deal with the vast structural problems involved in setting up and regulating a relatively free financial system, Japan's problems are much more short run and, one would think, more easily manageable. However, economic stagnation is persisting longer than many had expected, and governmental action has lagged behind events.

The case for an income tax cut is fairly obvious, but it is being delayed in part because an inexperienced new government is also dealing with even hotter political issues such as electoral reform and rice imports.

One would think that in such circumstances the Bank of Japan should take the initiative to reduce already low short-term interest rates significantly further. That would help stabilize the weak stock market, lower the yen on exchange markets, and aid the profitability of a much-beleaguered banking system. But, thus far, the central bank has been slow to act.

Sustained growth in China and a return to growth in Japan are of course greatly in the interests of the United States. Our economic recovery is moving into a moderate expansion phase based largely on growing domestic demand. Good growth abroad would solidify our expansion by adding the competitive U.S. export industries to the mix.

Mr. Axilrod is vice chairman of Nikko Securities Co., New York.

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