[A-List] Japanese crisis: ramifications
Michael.Keaney at mbs.fi
Fri Mar 22 06:52:24 MST 2002
Japan's economic 'Swiss' option
By Brad Glosserman
Asia Times, March 16, 2002
Despite the hype, Japan's latest anti-deflation package has failed once again to impress the critics. This failure is remarkable given the international attention that has focused on the proposal and the pressure applied by the US government in the lead-up to last month's visit by US President George W Bush.
For much of the world, Tokyo's inaction is inexplicable given the stakes involved - the loss of international prestige and the risk of a worsening economic environment - not to mention irritating its most important partner.
Yet from another perspective, Japanese behavior makes perfect sense: The reluctance to embrace sweeping - and potentially painful - change not only reflects the power of vested interests, but it also reveals the extent to which Japan remains wedded to its distinctive economic model and the values it represents.
The conventional assumption that Japan will eventually converge with Anglo-American capitalism is misguided. Japan will maintain its distinctive form of capitalism even at the price of considerable economic losses; indeed, it already has. The US must readjust its thinking to be prepared for yet more "inexplicable" behavior. Unrealistic expectations are the chief threat to alliance management in the years to come.
By just about any standard, the Japanese economy is dysfunctional. Japan has registered the slowest 10-year performance of any large industrial country in the postwar era. Unemployment has reached historic levels, national debt is now 130 percent of GDP (including all liabilities could force the figure as high as 220 percent) and the financial system is burdened with nonperforming loans that threaten its future. Optimists forecast 0 percent growth this year.
Yet, incredibly, the government continues to dither. Even today, Japanese diplomats and bureaucrats question international concern about the Japanese economy and challenge the priority that the US has put on reform.
Part of the explanation for the nonchalance is the country's tremendous wealth. Unlike, say, South Korea, which hit the wall in 1997, Japan's massive savings have cushioned the fall. This vast reserve allows Japan to experience what any visitor to Tokyo would have to call a "golden recession".
The lack of urgency also reflects disagreement within the government and the ruling coalition about the roots of the problem. Some still argue that this is a largely cyclical recession; they point to the US downturn that has deprived Japan of a key export market. They maintain that a US recovery, coupled with a strong fiscal stimulus, will restore a respectable growth rate.
Members of this school call for Prime Minister Junichiro Koizumi to drop his self-imposed budget limits and demand that the Bank of Japan aggressively inflate the economy.
This option has two powerful arguments in its favor. First, it is doable. By dodging reform, it outflanks the vested interests that, according to economist Edward Lincoln of the Brookings Institution, make up over half of the Japanese economy. These groups, which comprise farmers, construction companies, retailers, small and medium-size businesses, mortgage holders, and others, have no desire to change a system that serves their interests.
Second, this option is considerably less painful than the alternative: structural reform that would transform Japan's economy and, in the process, its socio-political landscape. Genuine reform would yield stunning job losses. By some estimates, unemployment could reach as high as 10 percent; really cleaning up the bad debt mess could throw another million people out of work.
This is both painful and politically unpleasant, but the greatest obstacle to real reform is Japanese reluctance to change core values and basic features of the country's distinctive economic model. Key features include bank-led financing and corporate governance, keiretsu (corporate) networks, and a high degree of government intrusion into the economy, among others.
Japan is understandably proud of a system that created the world's second largest economy out of the rubble of World War II. Even after a decade of stagnation, the Japanese enjoy historically high levels of affluence and national well being. A mere decade of stagnation - and a relatively painless one at that - is hard to balance against the gains of the past half century.
Pride isn't the only consideration: there are plenty of base reasons to cling to the status quo. Not only are there vested economic interests, but bureaucrats are loath to give up the perks and powers that have been bestowed upon them.
Finally, and perhaps most important, are the values that underpin the Japanese economy. There are a lot of myths - such as the notion that 95 percent of Japanese are middle class, or that lifetime employment is a widespread practice - but they are myths that the the Japanese cherish. They appeal to the egalitarian mindset and the notion of a united, homogeneous population that has been an integral part of Japan's nation-building process. Top that off with a risk-averse outlook and a group-oriented culture and the glacial pace of change makes perfect sense.
My guess is that the appeal of the Japanese model is not only powerful enough to slow reform, but it will prevent any convergence with an "Anglo-American" system. Just as Switzerland has preferred to stay apart from Europe in an attempt to preserve its distinctiveness, so too will Japan endure economic losses to maintain its identity.
This may sound absurd, but it is precisely what Japan has done over the past decade. Official National Accounts Statistics indicate that Japanese households lost approximately 500 trillion yen (US$3.9 trillion) (more than 100 percent of GDP) of their net wealth between 1990 and 2000. According to one estimate, the Japanese stock market has lost 130 trillion yen in value since Koizumi took office. The Topix index has lost 300 trillion yen in market capitalization, or about 60 percent of GDP at today's output.
China's emergence as an economic power could provide additional reasons to opt for the "unique Japanese identity". Rather than compete with China, Japan could settle for second place in the region, preferring a comfortable existence as a "lifestyle superpower" that ranks among the top 10 economies to the sacrifices that would permit it to remain within the top three.
This theory has powerful implications for the United States. It means that reform will be gradual and incremental. Change will occur - it already has - but it will be slow. There is little that the US can do to get Japan to move faster.
Hectoring and complaints will only alienate an important ally within the region. Even if Japan should opt to "opt out", it will continue to be a pillar of the US presence in the region. Japan still has ambitions and a role to play in Asia, but Tokyo will be increasingly challenged to do so as its resources dwindle.
Koizumi's recent Southeast Asian tour is illustrative of the difficulties that lie ahead: At every stop, he was told that Japan's most important contribution to regional stability would be economic recovery at home.
Washington will have to be ready as Tokyo's ability to contribute to regional security diminishes. As always, the key to alliance management will rest on realistic expectations. Shedding the mistaken notion of eventual convergence of Japan and the US is a critical first step.
Brad Glosserman is Director of Research at Pacific Forum CSIS.
(Reposted with permission from Pacific Forum CSIS. http://www.csis.org/pacfor/ Based in Honolulu, Hawaii, Pacific Forum CSIS is a non-profit, private, public policy research institute which operates as the Asia Pacific arm of the Center for Strategic and International Studies of Washington, DC.)
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Mercuria Business School
michael.keaney at mbs.fi
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