Japan Lacks Political Will to Save Ailing Economy

Yoshie Furuhashi furuhashi.1 at SPAMosu.edu
Thu Dec 14 19:25:20 MST 2000

The Independent (London)
November 30, 2000, Thursday
BYLINE: Diane Coyle

IT IS HARD to argue that Yoshiro Mori, Japan's prime minister,
deserved to survive the recent attempted no-confidence vote in his
leadership. After all, he appears to have derailed the tentative
economic recovery, wiped a fifth off the value of the stock market
and nearly halved the country's trade surplus. The world's second
-biggest economy has now suffered a decade of stagnation. As Paul
Krugman, the eminent US economist, put it, even before Mr Mori made
his own personal contribution to this calamity: "Japan's economic
officials have subtracted value from their nation, and the world as a
whole, on a truly heroic scale."

A year or six months ago, it was starting to look as though there was
finally some light at the end of the tunnel. There were
quarter-on-quarter increases in GDP after five straight quarters of
falling output. Price deflation slowed down. Even negative indicators
such as rising unemployment and an increased number of corporate
bankruptcies could be read as a healthy sign, as they suggested
necessary economic restructuring was starting to take place.
Similarly, the fact the trade surplus started to fall at least
suggested that Japan was becoming more open to imports from overseas
and that domestic demand was robust enough for consumers and
companies to continue buying imported goods.

However, the budding signs of a return to growth have since withered
away. Figures earlier this week showed retail sales declined in
October for the 43rd month running, reaching a level 2.4 per cent
lower than a year earlier. And senior politicians from the ruling
Liberal Democratic Party met earlier in the week to discuss what
could be done about recent share price falls. The broad TSE300 index
has declined 20 per cent since midsummer.

Some economists have raised their odds on Japan toppling back into
technical recession. And this is despite the continuing painful
process of cleaning mountainous bad debts off the balance sheets of
the banking system, and an unprecedented series of expansionary
budgets to keep stimulating the economy. The ratio of net government
debt to GDP has doubled in two years, according to official figures.
But these, showing a ratio of 40 per cent, exclude off-balance sheet
liabilities which take the figure up to 120 per cent and rising fast.

That government debt is so high almost certainly makes any further
fiscal stimulus counter-productive. Additional government borrowing
will only put upward pressure on long-term interest rates. One of the
lessons macroeconomists have learnt from the US and even UK
experience during the 1990s is what a powerful economic stimulus
reducing the level of government debt can be. High public sector
borrowing does crowd more productive private sector borrowers out of
the capital markets.

That leaves monetary policy as the only remaining macroeconomic tool.
The Bank of Japan (BoJ) spent much of the early part of this year
itching to push the zero short-term interest rate higher, finally
doing so on 11 August, thereby rejecting a formal request from the
government to postpone the decision.

However, the most expansionary monetary policy possible is a sine qua
non for Japan's economic recovery. Professor Krugman has suggested
the BoJ ought actually declare a positive inflation target in an
attempt to prevent further deflation. The reason is that the economy
needs radical structural reforms whose short-run effects will be to
increase uncertainty, sap confidence and generally undermine growth.
The most dynamic political system finds it difficult to accommodate
such changes - watching the continental European economies undertake
changes to pensions, employment laws, competition policy and so on
makes that perfectly obvious. It can be even more difficult to be
radical when there is simply no growth to cushion the pain.

For the problem in Japan is not so much one of economics as politics.
There is a broad consensus among economists about the necessary
policies. They include opening the country more to imports and
investment from overseas, continuing banking restructuring, and the
shake-up of the cosy old relationships in the corporate sector,
introducing a more vigorous competition policy, deregulation, and, as
all could harm growth short term, against a background of a loose
monetary policy.

However, Mr Mori's opinion poll ratings have slumped to 18 per cent
and he narrowly survived the no-confidence vote only because rebels
in his own party abstained at the last minute. It is hard to see him
deciding to go ahead with a more radical structural shake-up of the
economy that would close businesses and put more people out of work.

There is some New Economy-style hope for Japan. The strongest element
of demand growth this year has been in IT investment. The Information
Technology Strategy Council, formed during the summer, has this week
started an intensive lobbying campaign to deregulate
telecommunications, criticising NTT for exploiting its local monopoly
to charge high rates that limit internet use. Nobuyuki Idei, the Sony
chairman and head of the council, said it had been possible to launch
this effort so quickly because of "our sense of crisis".

More important, perhaps, economists at Lehman Brothers single out the
importance of the Net as a campaigning medium for reformist
politicians in recent local elections. Even the bold politicians
eager for change face an enormous obstacle in the shape of a
conservative bureaucracy, however. What they would need to overcome
such resistance is either a commanding popular mandate or an
overwhelming new economic crisis. The danger is that if they don't
get the former, the absence of politically inspired change will lay
the foundations for the latter.

d.coyle at independent.co.uk

GRAPHIC: Tokyo's skyline. A radical structural shake-up of the
economy is needed but the slump in Prime Minister Yoshiro Mori's
opinion poll ratings means it is unlikely he will risk moves that
could cost jobs.

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