Tokyo hardly seems like a city in crisis. Downtown, things look much the same as they did before the bursting of the bubble 12 years ago -- busy and bustling. Yet there are those who say the neon-lit night skies hide a murkier picture of stagnation and decline. Japan, they say, is like the old Soviet Union staggering towards its demise -- a place where a cabal of government, bureaucracy and special interest groups conspire to stifle change.
Such comparisons have been encouraged by the performance of the Japanese economy since 1991 -- slow growth punctuated by three recessions, a decrepit banking system and persistent deflation. The country even has its own Mikhail Gorbachev in Prime Minister Junichiro Koizumi, a young charismatic leader who came to power two-and-a-half years ago promising radical reform of the world's second biggest economy. Just like Gorbachev, Koizumi has found that talking about structural reform has been much easier than achieving it. There has been plenty of glasnost, less perestroika.
ILLUSTRATION: MOUNTAIN PEOPLE
"Koizumi is becoming more conservative by the day," says one commentator frustrated by the lack of urgency. "He doesn't understand the policies he is proposing, so he can't decide anything."
There is now a vocal liquidationist tendency, which says Japan needs a catharsis for real recovery, a final crisis that will purge the rottenness from the political system and force root-and-branch reforms of banking, public spending, pensions and the large chunks of the Japanese economy seen as inefficient.
Having just spent a week in Japan as a guest of a think tank, the Keizai Koso Center, this analysis seems absurdly exaggerated. Despite the superficial similarities, Japan is not the next Soviet Union. It is emerging from the post-bubble era and under the right conditions can look forward to a period of growth.
There are half a dozen reasons for this conclusion. The first is the hard data. Possibly central Tokyo provides a distorted picture of life in Japan as a whole; capital cities often do that. Even so, the economic numbers show business confidence rising, exports strong, industrial production growing rapidly, investment starting to pick up and consumer spending relatively robust. Big companies appear to be doing better than small and medium-sized enterprises, and cities are doing better than rural areas, but the trend is upward.
Second, policy-makers have learned lessons from mistakes made in the recent past. The recovery in 1997 was snuffed out by premature tightening of fiscal policy, that in 2000 by an increase in interest rates. This time the Bank of Japan and the Ministry of Finance are taking no chances; it was made clear to us last week that the zero interest rate policy will remain in force until there is glaring evidence that deflation is a thing of the past.
In addition, ample liquidity will be flooded into the economy to underpin the banking system, the government will intervene to prevent the yen from rising too rapidly against the dollar and steps will only be taken to reduce Japan's enormous fiscal deficit once the country is firmly back on its feet.
The Bank of Japan is adamant that the way to keep downward pressure on short-term rates is to convince the markets that zero short-term rates are here to stay. That's the right policy for a number of reasons -- it reduces the cost of servicing the budget deficit, it limits the interest payments on corporate and consumer debt and should encourage firms and individuals to spend rather than save.
Third, the banking system is gradually being sorted out. As far as the bigger banks are concerned, the quantity of bad debts has been cut appreciably and their balance sheets look a lot healthier, mainly because the corporate sector has been taking steps to cut its debt.
Pessimists say that has left the banks in an even more precarious position because they are now saddled with just the debts of the weaker companies, and it is certainly true that the smaller, local banks still look vulnerable, as shown by the government's nationalization of the Ashikaga bank last week. The key thing now for the government is to drop the idea that the assets of renationalized banks should be disposed of, since that merely puts further downward pressure on land prices.
Fourth, the government has not abandoned the reform process, merely proceeding at what appears to be glacial pace.
This is where Japan's pork-barrel politics clog up the system, with the factionalism in the ruling Liberal Democratic party (LDP) and the need to win votes out in the poorer rural areas handicapping those eager to press ahead urgently. The next six months will prove whether Koizumi can deliver on changes to the pension system to cope with Japan's ageing population, whether his promised plans to privatize the postal savings system -- a prime source of funds for uneconomic infrastructure projects -- and whether he has the will to face down the construction lobby (aided and abetted by factions in his own party) who have been busily milking public funds to build roads that nobody uses. Yet pork-barrel politics are by no means exclusive to Japan and the lack of structural reform should only slow up the pace of recovery, not stall it. By promising change, Koizumi has also opened up political space for parties who argue that he is incapable of delivering it as leader of the LDP, the ruling party since the early 1950s.
The two final factors are probably the most important of the lot. Japan's growth is being helped by the explosive growth in China, which has not only been helpful for its semiconductor industry but for traditional sectors such as steel and cement as well. In the short term, recovery in the US has also been a godsend, but the dynamism of China and the rest of East and Southeast Asia is a potential source of growth for Japan stretching way into the future.
Even if China's asset price bubble leads to a financial crisis in the next two or three years, this will no more prevent China's rapid growth than did the puncturing of the railroad bubbles in the 19th-century US.
Ultimately, the reason Japan is able to exploit China's emergence as an economic superpower is that it has an array of world class companies producing goods which other countries want to buy. Recovery is being propelled by the exports from Japan's hugely competitive manufacturing sector -- cars, machine tools, computer chips, electrical goods. Toyota showed off its new hybrid car, which runs on a combination of petrol and electricity, and is seen as a short-term answer to greener motoring until it has come up with a viable fuel-cell technology. Darryl Green, head of Vodafone in Japan says that the best mobile phones in the world are not made by Nokia or Motorola but by Sharp.
This is all proof that Japan is light years away from becoming the new Soviet Union.
While it is certain that low-cost bulk Japanese manufacturing will be vulnerable to cheaper global competition, the fact that research and development and production take place side by side means that highly profitable top notch manufacturing -- such as the new eco-friendly Toyota -- is built at home rather than being outsourced. Sure, Japan could still be knocked off course in the short run by problems in both the US and China or by renewed disaster in the banking sector. But ultimately this is a country that makes vast quantities of high-quality goods at a time when demand will soar from the three billion people in China, India and Eastern Europe who have joined the market economy in recent years.
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