or Prime Minister Ryutaro
Hashimoto, a proud man, it was a humiliating week. One of Japan's leading industrialists,
Sony Chairman Norio Ohga, said the economy was "on the verge of collapsing" and
compared Hashimoto to Herbert Hoover, the president who led the United States into the
Great Depression. Credit-rating agency Moody's warned that it might have to downgrade
Japan's once-rock-solid debt rating. And markets sneered at Hashimoto's plan for recovery:
Stocks and the yen both plunged.
But the strain didn't show until, at the end of a trip to London for the Asia-Europe
summit, Hashimoto was asked yet again about the economy. Rattling off figures on Japan's
huge foreign reserves, he demanded: "How can you say a country like that is on the
verge of collapse?"
Ohga's claim did seem far-fetched to a world accustomed to thinking of Japan as an
economic powerhouse. World leaders, notably U.S. President Bill Clinton, have assumed that
Tokyo's ills are curable so long as it swallows the right medicine.
If only it were so simple. In fact, after seven years of government dithering, the
likelihood that Japan can avoid severe economic pain is diminishing rapidly. Hashimoto
hopes to keep Japan from careening off a cliff with a quick fix of massive public-works
spending and tax cuts. But political rivalries have distracted him, and there is a growing
fear that such old-style programmes don't work, anyway. Confidence among Japanese
consumers is so low that the road of real reform--closing failed banks, encouraging
companies to lay off unneeded workers--could have an even more devastating immediate
effect on the economy.
So Japan has no easy choices. Many analysts feel shock therapy is the best hope to
finally put the economy back on a sound footing. But if history is any guide, politicians
will go to great lengths to delay a crunch, leaving Japan's future to grow ever bleaker.
"Japan Inc. is unravelling," says David Asher, a Japan scholar at Oxford
University. "We've got this metastasizing cancer of the economy."
All this is bad news for Asia, which needs all the help it can get to claw its own way
back to economic health. Japan looks unlikely to serve as a locomotive of regional
recovery; indeed, it may be counterproductive for Asian leaders, displeased though they
may be with Tokyo, to even hope for such an improbable goal. Japan's imports from Asia are
down, its companies are pulling out of Asian investment, and the Japanese currency is
weak. Worse, it could plunge much further--threatening South Korean industry and possibly
forcing China to devalue the renminbi.
In recent days, the signs of trouble brewing in Japan have spread dramatically. The
Bank of Japan's latest quarterly survey of business sentiment, released on April 2, showed
a sharp increase in pessimism among companies. Household spending was down 4.5% in
February from the same month a year earlier, and car sales dropped 15% in the year ended
on March 31. Unemployment rose in February to 3.6%, the highest level since Japan began
keeping statistics in 1953.
Meanwhile, the yen has fallen to around 135 to the dollar, and some analysts are
predicting a further weakening to the 145-150 level or worse as investors seek the
relative safety and high yield of dollar-denominated assets. Such a drop, says William
Kaye of the Asian Hedge Fund in Hong Kong, would have a "devastating impact on
Korea," which competes against Japan in a number of industries, including shipping
and electronics.
This all means that Japan now faces a classic deflationary spiral, triggered by a lack
of consumer demand. Inventory is building up, prompting companies to cut prices--and
production. That hurts employment, which in Japan usually means hiring fewer temporary
workers and reducing overtime hours. The resulting uncertainty further damages consumer
confidence, reducing demand even further and restarting the whole cycle. "You have
chronic oversupply in the economy, and that's what causes deflation," says Masaharu
Usuki, an economist at the research institute of the Long-Term Credit Bank of Japan.
Overall, says Giles Ockenden, a strategist at Jardine Fleming in Tokyo, "the risks
of the whole system having a collapse are much higher than they were six months ago."
He says there's a 50% chance that the economy will shrink this year and that the Nikkei
225 Average, Tokyo's main stockmarket indicator, will tumble to 12,000. (It's now around
16,000.) Ockenden sees a slight but real chance of a catastrophic crash to 8,000, which he
believes would spark a global recession.
The government, of course, doesn't see things that way. The standard solution to
deflationary traps is stimulating the economy, and that's what Japan is finally beginning
to do. A ¥16 trillion ($120 billion) package announced by the ruling Liberal Democratic
Party in late March contained few details at first, but it is now expected to include at
least ¥5 trillion in actual government spending. (The government often inflates stimulus
packages with loans and land purchases that don't translate into GDP growth.) In London,
Hashimoto also announced plans for a tax cut, which officials have hinted will total at
least ¥4 trillion.
Even Yoshio Suzuki, an opposition member of parliament who has led criticism of
Hashimoto's policy, says he's optimistic that the economy will turn around after two more
quarters of recession. Suzuki, a former head of Nomura Securities' research institute,
predicts Hashimoto will reverse course and adopt a tax cut in the range of ¥10 trillion
after the ruling party's expected victory in elections for half of the upper house of
parliament in July.
The only reason Hashimoto can't act earlier is a law mandating budget-deficit
reductions, passed in December. If he reverses his belt-tightening course so soon, he
fears opponents will jump on his flip-flop and try to hound him from office.
"If enough of a stimulus is announced, confidence will revive," says Suzuki.
So long as the global economy is stable, he adds, "I cannot imagine the collapse of
the Japanese economy."
Optimists see a precedent in Japan's growth of 2.8% in fiscal 1995 and a further spurt
of 3.2% in fiscal 1996, a recovery sparked by public-works spending without any
significant structural reforms.
If the economy were to recover this time, Japan theoretically would be in a position to
address its structural problems. Bank failures might then worry consumers less, so long as
the government assured them that it would protect their deposits. Life support for the
weakest companies could be cut off without infecting the entire country with a fear for
the future. Already, Japan has begun long-delayed deregulation of protected areas of the
economy--the Big Bang in finance being the most notable step--and that might be
accelerated.
All this could happen--but don't count on it. For one thing, crises have a way of
spiralling out of control. That is especially a risk over the next few months, when
confidence is likely to be at its lowest and markets are sensitive to any sign of delay in
government measures, such as deep tax cuts. "They're chasing a train that's going
down a hill," says Ockenden. "They have to keep increasing the size of what
they're promising, and the markets are never satisfied."
The bigger worry is that the stimulus package may be of only fleeting efficacy. Many
economists fear that nervous consumers will save most of what they receive from tax cuts
unless they are more substantial than in the past. And Japan's pump-priming formula is a
proven loser for creating lasting growth.
The main impact of pump-priming is keeping the ruling LDP in power, instead of setting
the stage for deep reform. The LDP, opposition legislator Suzuki says, is a "strange,
strange party--a coalition of minority interest groups." Among the most powerful are
construction companies, older rural voters who depend on public-works projects for jobs
and the nationwide association of postmasters.
The nature of this coalition is the main reason why the government has delayed serious
reform: It didn't want a shake-up that would threaten its supporters, and preferred the
quick fix of public-works spending to help contractors. This history makes it hard to see
how the LDP could ever make tough choices such as closing down bad banks, privatizing the
state-run postal-savings system or allowing stock prices to reach natural levels instead
of propping them up with public funds.
The government's spendthrift ways have left a heavily indebted country that looks more
than deserving of a credit warning from Moody's. Japan's gross debt as a percentage of GDP
is already approaching the levels of Italy and Canada, the two G-7 countries that don't
enjoy Moody's top rating. "We're seeing the destruction of a nation's hard-earned
wealth," says Asher, the Oxford scholar.
Asher and Andrew Smithers, a London-based economic consultant, have just published a
report that estimates Japan's true total debt at nearly 150% of GDP, a level far beyond
that of Italy. Asher and Smithers note that the government takes the money deposited in
Japan's postal-savings system and lends much of it to questionable borrowers who can't get
credit elsewhere. Many of the debts are probably irrecoverable, yet none of these bad
loans are included in official estimates.
Not everyone thinks Japan's debt has reached a critical stage. Unlike the U.S. in the
late 1980s, Japan has an excess of savings over investment, which means its budget deficit
isn't hogging savings to the detriment of private businesses that need investment.
But to the fast-growing number of greying Japanese worried about their pensions when
they retire, the debt numbers certainly look disconcerting. That's why they won't
automatically run to neighbourhood retailers if a tax cut puts a bit more change in their
pockets. Says Ron Bevacqua, an economist at Merrill Lynch in Tokyo: "Anyone who pins
their hopes on fiscal policy to fix the economy is fooling themselves."
Consumers' fears could also confound any attempt to carry out genuine reform without
plunging the economy into recession. The sudden closures of Hokkaido Takushoku Bank and
Yamaichi Securities last November dampened consumption and sent Japanese scurrying to buy
household safes or transfer their money to the postal-savings system. If a further
shake-out were to occur in better times, the same response could be expected.
Still, Bevacqua favours closing bad banks and letting their deadbeat borrowers, such as
construction companies, go under. Otherwise loans will continue to flow to unproductive
businesses instead of funding promising new ventures, and the trustworthiness of Japan's
entire financial system will remain in question. Yet politicians for now seem bent on
reaching into what Bevacqua calls their "bottomless pit of Band-Aids" to
postpone the day of reckoning. Japan may yet avoid fulfilling the Sony chairman's prophecy
of collapse, but the costs in debt and economic decay will grow ever greater.
Page
Back to Japan 