Analysis: Japan's Rising Economic Peril Has Political Roots

Analysis: Japan's Rising Economic Peril Has Political Roots

by Sheryl WuDunn

TOKYO -- As the world's second-largest economy lurches to a standstill, possibly threatening to cause a global slowdown, the fundamental reasons are political, not economic.

Prime Minister Ryutaro Hashimoto is a weak leader governing with a fragile coalition of parties and factions that seldom agree with each other, so the government finds it difficult to shift economic directions even as it becomes clear that the Japanese ship of state is heading toward an iceberg. And the Japanese system is based on consensus, which has always made decision-making difficult in a crisis.

"The Hashimoto administration is in a terrible situation," said Makoto Sataka, a writer on economic issues. It is flying a plane, he said, and the "destination of such a plane is a crash."

On Friday, President Clinton renewed his pressure on Hashimoto, calling on Japan to "take a bold course" and stimulate its economy. But the problem in a sense is that there is no counterpart to Clinton in Tokyo. Tokyo is a many-headed hydra, with each head looking the other way and blaming the next.

"There is wealth here in Japan, there are diligent people here in Japan, there is obedient labor in Japan," said Ryuji Konishi, former managing director at the Long Term Credit Bank, one of Japan's largest financial institutions. "However, there is no leadership."

Yet, equally paradoxically, the problem is not simply one of lack of decisiveness. A year ago, the leaders in Hashimoto's government were unusually decisive -- but in pushing through a tax increase, cutting public spending and suspending tax breaks. All of that helped push Japan toward its present economic disaster.

Having established that policy direction a year ago, Hashimoto's government is finding it extremely difficult to be decisive once again and to switch courses. So now Japan is paying the price for those fiscal austerity measures, and for seven years of delays in confronting the country's economic troubles.

The result is that consumers' willingness to spend has fallen to its lowest level in nearly three decades, unemployment has soared to a 45-year high, unsold products are piling up in warehouses, and wages and industrial production and corporate profits are all sliding.

Many economists say that Japan is now headed for its first major recession in a quarter-century. Such a downturn, they say, could prompt Japanese companies to cut back or abandon operations in the United States and elsewhere around the world, or to sell off assets to bring their money back home.

It would certainly dim prospects for a recovery in the Asian financial crisis.

Asian countries dependent on exports desperately need buyers for their goods, and so far the United States has filled that role. But Japan, the world's largest creditor nation, with an economy twice as big as the rest of Asia combined, has so far been unable to absorb many more products from countries like Thailand, Indonesia, Malaysia and South Korea because of its own economic weaknesses.

The United States -- along with many private Japanese economists -- is urging two strategies to revive the Japanese economy and avert a dangerous downturn. The first is a huge fiscal stimulus, some combination of deficit spending and tax cuts. The second is far-reaching economic deregulation.

The Japanese government has made some headway in both, but not much.

Hashimoto has been reluctant to pursue the fiscal stimulus, because until a few months ago he was hailing as a major triumph his opposite strategy: fiscal austerity measures intended to put the government on a more sound financial footing. Over the last few months, under strong American pressure, he has agreed to take some kind of stimulus measures, but it is not clear how much.

"We will boldly do what we have to do," Hashimoto told Japanese reporters on Friday, the Kyodo News Agency reported.

In fact, some Western economists say that the Japanese government has a reasonable position in its concern for fiscal deficits. The aging of the Japanese population is projected to lead to huge spending in the coming decades, and that makes it all the more important to cut deficit spending now -- and Japan has a huge budget deficit already.

Yet the general verdict is that while the government's concern is legitimate, it has been too obsessed with the issue. These days, most say, the risk of a recession is so severe that some greater fiscal stimulus is essential, even at the risk of worsening the government's accounts.

"The government should borrow," said Shijuro Ogata, a former deputy governor at the Bank of Japan. "We have enormous savings. The government should not worry about borrowing, for the sake of the country, for the sake of Asia and for the sake of the world."

Yet the government has another practical reason for delaying over recent months. The fiscal stimulus will come in a supplemental budget that can only be drawn up after the regular budget is approved later this month. So under the rules of the political game here, Hashimoto cannot really begin talking about the details of a fiscal stimulus for a few more weeks.

The other approach to stimulating the economy -- deregulation -- will be difficult because most of the proposed efforts at deregulation are opposed by key interest groups and simply cannot be pushed through Parliament by a weak leader like Hashimoto.

On Wednesday, Japan did introduce a wide-ranging financial deregulation package called the Big Bang, for which many have high hopes. But just a day earlier, the government reverted to a traditional tactic of propping up the stock market with public money to help support the banks that rely on stocks to boost their capital base.

A broader problem is that Japan has been so used to the idea of government direction over the economy that few Japanese leaders seem to have a clear vision of the direction that most of the industrialized world is headed.

"I don't think they fully understand what the market means," said Shigenori Okazaki, a political analyst at SBC Warburg Dillon Read in Tokyo. "They lack a fundamental understanding of a market economy. They are more worried about farmers losing jobs in construction work. To me, it's a simple mismatch of the system."

To be sure, Japanese leaders have taken some important measures in recent months: a $15 billion tax cut, a $222 billion bank bailout, a 16 trillion yen, or $120 billion, package of economic stimulants.

"Japan is starting to take correct action," said Richard Koo, chief economist at Nomura Research Institute. "If the 16 trillion yen has real public spending, public spending always works."

But some economists say the problem is that Japan's leaders waited too long. The tax cut put $15 billion into the pockets of Japanese consumers in February, but the effects were negligible. So economists worry that an even greater tax cut may not give as big a boost to the economy as is hoped.

The $222 billion in public funds for the banks has helped increase the capital base of the banks and thereby bring about some stability, but there is still a credit squeeze as banks remain reluctant to lend amid a time of rising corporate bankruptcies.

The $120 billion package is currently being drafted, but economists say they fear that much of the package will be in the form of government loans that will replace bank lending rather than actual money that will stimulate the economy.

Japan's economic troubles began when the speculative bubble burst in the early 1990s. Since then, Japan has been battling a banking crisis caused by a plunge in the property market that led to bad and doubtful debt of more than $600 billion, an amount larger than the size of the entire Chinese economy.

Then last fall, four financial institutions collapsed, leading to a sharp financial crisis, and corporate bankruptcies are now soaring. With economies throughout Asia shrinking, and thus the appetite for Japanese exports declining, Japan's economy is suffering its worst crisis in decades.

"The real fact is that there is no magic bullet, and they have a very complex economic adjustment going on," said Jesper Koll, economist at J.P. Morgan Securities Asia Ltd. about the Japanese leaders. "We are in a period of crazy ad hoc-ism."