Japan Seems Paralyzed by Asian Crisis
by Sheryl WuDunn with Nicholas D. Kristof
TOKYO -- As a financial crisis sweeps through
Asia and provokes fears of a global downturn, Japan is the one
economic force powerful enough to pull the region back to
The catch, however, is that Japan, the world's largest creditor nation, with an economy twice as large as all the rest of Asia, is not part of the solution but a major part of the problem.
Japan's leadership is in disarray, and has dithered for the last seven years of its own downturn. Many economists say that the Japanese government -- by denying its problems or even dissembling about them -- has prolonged its own economic torment and contributed to the Asian financial crisis.
Wednesday Japan announced $16 billion in tax cuts and later in the day plans to formally unveil a $77 billion bailout of its own financial mess -- a package bigger than the $57 billion International Monetary Fund rescue for South Korea. The scale is inevitable: the assets of a single Japanese bank, Bank of Tokyo-Mitsubishi, are roughly 10 times the size of the entire South Korean stock market.
Despite such plans, few analysts expect Japan to move decisively to address its own problems or Asia's.
Referring to the leadership of Prime Minister Ryutaro Hashimoto, William Overholt, a managing director at Bankers Trust Co. in Hong Kong, said, "The extent of Japanese mismanagement of its own economy in the last seven years, particularly under Herbert Hoover Hashimoto, is one of the overwhelming themes of the modern era."
While the parallel between Hashimoto and President Hoover may seem overblown, it is heard increasingly these days among Hashimoto's foreign critics here. Like Hoover at the beginning of the Great Depression, Hashimoto has adopted what some regard as a contractionary fiscal policy in the face of a banking crisis and an overall economic slowdown.
And, as with Hoover's America, the downturn in Japan is not just a domestic problem; it is also slowing growth around the world. As the largest creditor nation, Japan is far and away the most important source of capital around the globe, and it helps feed the United States' enormous appetite for funds on a daily basis.
"The U.S. needs to borrow a billion dollars every day the markets open," said Kenneth Courtis, chief economist at Deutsche Bank Group Asia-Pacific. "And Japan is the principal supplier of that capital. If Japan gets knocked out of that equation, and instead of exporting capital it imports it, who could replace Japan? What would happen to the U.S. bond market? What would happen to Wall Street?"
One of Japan's biggest challenges is a vacuum of leadership. Hashimoto barely has command of parliament and his saving grace is only that the opposition is even more dispirited than he is. The Finance Ministry normally sets economic policy, without paying much attention to the prime minister, but lately the ministry has been under assault as well and is distracted by efforts to curb its power and break it up.
Tax Hike Proves a Major Mistake
One of the most catastrophic missteps was the decision to emphasize fiscal austerity and raise the national sales tax this spring from 3 percent to 5 percent. The result was that the economy plunged at an annual rate of 11 percent in the second quarter, the worst figure in nearly 25 years, and economists are warning that Japan may now be poised on the brink of a recession.
It is not that no one warned Japan. Private economists in Japan and the U.S. government protested repeatedly that the tax increase would be more than the fragile economy could withstand.
But Japanese officials were adamant, particularly those in the Ministry of Finance at the pinnacle of the nation's bureaucracy. They mistakenly believed that the economy was strong enough to tolerate the tax increase.
Eisuke Sakakibara, a vice minister of finance, as well as other officials, including Yasuo Matsuhisa, governor of the Bank of Japan, repeatedly offered upbeat assessments of the economy that, in retrospect, could scarcely have been further off the mark.
Sakakibara and Finance Minister Hiroshi Mitsuzuka declined to be interviewed for this article. But the government early this month formally acknowledged that the economy is not recovering after all, and that it is at a "standstill."
For now, Japan's most pressing problem is its banking crisis -- heightened by the risk of defaults in the coming weeks by South Korean banks. Japanese institutions have lent South Korea $24 billion, a monstrous sum that seems modest only when one compares it with the hundreds of billions of dollars in dubious loans within Japan.
"We're talking about the Asian financial crisis, but the biggest one is right here in Japan -- by far," said Richard Koo, a senior economist at Nomura Research Institute in Tokyo.
Japan's banks have been in trouble for seven years, but they and the government have yet to tackle the problem aggressively. Instead, the wounded banks have limped along, as Japanese officials downplayed the problems, but now some financial institutions have reached the end. One of Japan's 20 largest banks collapsed in November, and Yamaichi Securities, one of the "Big Four" securities firms, toppled a few days later.
What was particularly worrisome was not just the fact that Yamaichi collapsed, but the way it fell. It kept insisting that it was solvent, and then after collapsing it turned out to have an extra $2 billion in hidden losses. The Finance Ministry closely monitors the securities industry, and it either knew or did not know of these off-book losses; it is unclear which prospect is more alarming.
Deregulation Needed to Revive Economy
Even as the International Monetary Fund is urging Japan's neighbors to trim their growth, President Clinton has urged Japan to boost its economy from within. Such a policy could reduce the risk of a global financial meltdown and help the entire region emerge from its crisis.
This domestic boost could come in a couple of ways. Japan could try a fiscal stimulus, cutting taxes or raising government spending, or it could try deregulating the economy in hopes of generating an explosion of private spending. There is some evidence that concerted deregulation could set off a new Japanese boom.
In 1994, for example, Japan reluctantly agreed, under enormous U.S. pressure, to deregulate its cellular-telephone industry. The result was that the number of handsets increased more than 10-fold and cellular operators invested $13 billion in new systems. Moreover, Japan's engineers began to design more innovative telephones, including a Tracy-like model built into a wristwatch.
Enthusiasts argue that if Japan could muster the political will to address its bad-loan problems instead of letting them fester, if it could deregulate transportation, retailing, finance, agriculture, pharmaceuticals and other industries, the result would be a burst of energy that would revitalize Japan and stimulate all of Asia.
To be sure, Hashimoto has pledged to achieve far-reaching economic and governmental reforms or else "burn up in flames" trying, and he is presiding over preparations for a "Big Bang" that would introduce greater competition into finance. But the pattern repeatedly has been that far-reaching deregulation is proposed, debated, opposed by entrenched interests, and then emasculated by Hashimoto's colleagues in the ruling Liberal Democratic Party.
This has frustrated foreigners and Japanese alike.
"With Japanese politics, people will very often say they're going to do it, but it takes a long time before they reach a final conclusion," said Minoru Makihara, president of Mitsubishi Corp. "However, I think time and speed is of the essence."
Hashimoto is reluctant to stimulate the economy the other way, by cutting taxes or increasing government spending, because of a profound commitment to fiscal prudence and aversion to deficit spending. Hashimoto argues that deficit spending would be particularly irresponsible now because Japan's population is aging rapidly and will require enormous spending in the decades ahead.
A Declining Yen Might Hurt All Asia
The slowdown in Japan and the risk of a steeper recession are central to the current Asian economic crisis. Japan's position as the leading source of capital around the world means that if Japan's banks continue to falter, the pipeline of loans and investments could collapse. Nations in Asia need to export to Japan to boost their economies, but a depressed Japan is not in a position to buy those goods.
A continued fall in the yen could harm the competitiveness of products from elsewhere in Asia. This creates a risk of competitive devaluations in the region. If Japan now allows the yen to fall further, so that its exports can compete against those from South Korea, then China and other countries might be tempted to follow, setting off a dizzying downward spiral.
A related risk is that Japan and others will try to export their way out of the crisis. But this strategy would produce a torrent of imports in the United States just as there are signs that the U.S. consensus in favor of free trade may be eroding.
"I'm hopeful we will not have a repetition of the 1920s and 1930s, Smoot-Hawley and the beggar-thy-neighbor trade policies, but human beings are imperfect," said Michel Oksenberg, an Asia expert at Stanford University.
Failure by Tokyo to Take Larger Role
One of the central ironies is that Japan has long yearned for a larger role in Asia. Thus, this should be Japan's big moment, an occasion when it could win Asia's gratitude for rescuing the region from economic turmoil. But instead, Japan is too mired in its own problems to be of much help.
"Japanese people are worried about Asia, but they are more worried about Japan itself," said Yoshihide Soeya, a scholar of international relations at Keio University in Tokyo. "Instead of helping Asia out, Japan itself wants to be helped out."
Hashimoto himself recently expressed the nation's mood when he announced that Japan was "certainly not arrogant enough to think that we can take the role of locomotive for Asia."
The result is that Japan's role in the Asia crisis has been largely as banker and follower, taking the roles assigned by the U.S. Treasury Department. Japan put up $10 billion for the South Korean rescue package, twice as much as the United States, but the rescue was orchestrated from Washington.
"There's an increasing tendency to look to the U.S. and the IMF as the savior, rather than to Japan," noted Muthiah Alagappa, a specialist on Southeast Asia at the East-West Center in Hawaii.
To be sure, Japan did try to take on an important role as organizer of a proposed "Asian Monetary Fund," intended to help bail out troubled Asian economies. Some countries welcomed that idea, but the United States squashed it out of concern that the fund would tread on the turf of the IMF.
Over the last couple of years, Japan has set what is generally regarded as a miserable example, allowing huge speculative bubbles and enormous bad loans to accumulate without anyone paying much attention.
Moreover, for nearly a decade into the mid-1990s, as the yen strengthened under the backing of officials in Washington and Tokyo, Japanese loans and investment poured into Asian countries, boosting local economies but also sending stock and property markets soaring. The result was that Japan's bubble floated across Asia.
Then back home, Japan's financial crisis led the government to strike a deal with the United States to allow the yen to drop, and as a result the yen has lost about 60 percent of its value since its peak in 1995.
As the yen dropped, Asian exports began losing out to cheaper Japanese products. Trade deficits yawned, and then this year the crisis hit when currencies tumbled and countries found it difficult to pay back foreign currency loans to Japanese and U.S. banks.
The underlying lesson from Japan's missteps in handling its own economic crisis may be that markets have become too large and global to be managed by Japanese government bureaucrats.
For seven years, Japan's bureaucrats have been wrestling with market forces, trying to force them into submission, but the recent bankruptcies in Japan -- which the Finance Ministry could do little to prevent -- suggest that it is the bureaucrats who are now at the mercy of the market.
Some say that the bureaucrats may now learn the lesson and reluctantly bow to market forces, allowing Japan and the rest of Asia to boom again.
"This is the revolt of the market against government," Takeshi Sasaki, a political scientist at Tokyo University, said of Asia's crisis. "It will be the only good historical opportunity to integrate politics and the market, to show politicians that they should not ignore the market."
Copyright (c) 1997 by The New York Times Co. Reprinted by permission