Hi Jim Woolly, ... getting back to the serious business of gloom, doom and cleansing, at the place where it all first started, providing us with a benchmark case study, although we could argue that Japan did a fair job of navigating depression, based on government spending/borrowing capacity and by domestic savings.
stratfor.com
Japan: Broken Reform Pledges Piling Up For Koizumi
20 August 2002
Summary
Standard and Poor's warned Aug. 19 that Japan risked another credit rating cut due to Japanese Prime Minister Junichiro Koizumi's inability to follow through with promised economic reforms. A look at which reforms were dumped shows that Koizumi is well on his way to repeating the mistakes of his predecessors.
Analysis
Credit ratings agency Standard and Poor's warned Japanese leaders Aug. 19 that their country risked yet another credit rating cut due to the government's recent backtracking on economic reform pledges. The S&P's last cut in April 2002 reduced Japan's long-term credit rating to AA-. A new cut would drop Japan to A+, putting it at the same level as Botswana and Kuwait.
Japanese Prime Minister Junichiro Koizumi's abandonment of reforms -- such as the removal in August of a 30 trillion-yen ($250 billion) cap on government bond issuance for the 2003 fiscal year budget -- is not exactly shocking. He is from the same wing of the ruling Liberal Democratic Party as his incompetent predecessor, Yoshiro Mori, and his Cabinet contains several LDP dinosaurs that have expertly mismanaged the Japanese economy for years.
Even if Koizumi's stated desires to reform the economy were genuine, Japan's political system has institutionalized so many power groups that meaningful progress is impossible. At the end of the day -- or the end of Koizumi's tenure -- his most meaningful contribution to the Japanese economy may well be the many posters and T-shirts bearing his likeness that were sold at the height of his popularity.
Since coming to power in April 2001, Koizumi has not lived up to his reputation as a "maverick" or as a reformer. A quick overview shows where his pledges have fallen short and what that means for the world's second-largest economy.
Government Debt
One of Koizumi's biggest promises was to get government deficit spending under control. Japan's primary method of countering its decade-long economic slump has been to spend mountains of cash on infrastructure projects, which is unfortunately similar to Japanese development strategies of the 1950s, 1960s and 1970s. But the country really didn't need any more infrastructure, so the 1990s deficit spending boom has mainly resulted in multi-lane highways and dams being built in areas with no people or needs for hydropower or flood control.
The fact that Koizumi's anti-debt promise never got off the ground was due in part to opposition from the country's bloated construction industry, which constitutes about 10 percent of the non-agricultural workforce. In the end the prime minister never pledged to eliminate wasteful spending, only to limit it to 30 trillion yen ($250 billion), approximately 6.3 percent of GDP. Next year's budget already calls for new deficit spending of 35 trillion yen ($295 billion), in addition to new bonds to cover those reaching maturity, which will total about another 37 trillion yen ($310 billion).
Postal Savings Competition
The Japanese postal system runs the nation's largest personal savings operations, in addition to handling the mail. Centralizing capital was essential in the days when Japan needed directed investment to recover from World War II. However, leaving postal savings in government hands has allowed Tokyo to dip into the money whenever it needs to fund other government measures, including pork-barrel projects in rural constituencies.
Ending the government monopoly over postal savings, as Koizumi had promised, would have freed up as much as 255 trillion yen ($2.15 trillion) for private development. Instead, to keep out foreign competition, the government has piled on investment restrictions so severe that few if any Japanese firms will participate in what could have been a lucrative market. Under Tokyo's direction, postal savings will continue to be placed in government bonds that, while guaranteed by the "faith and good credit" of the Japanese government, have yields that are now, in essence, zero percent.
Currency Manipulation
The only portion of the Japanese economy doing even marginally well is the export-oriented sector. Therefore, pushing the yen down has been a central plank of government policy for years. With the U.S. recovery losing speed, Japanese policymakers fear, quite correctly, that Japan is about to have another recession -- its fifth since 1990.
Zembei Mizoguchi, director-general of the Finance Ministry's International Bureau, said Aug. 20 that the yen is too strong, an unsubtle hint that yet another series of currency interventions is about to begin. Such interventions may help the bottom line of a narrow sector of the Japanese economy responsible for about 10 percent of GDP, but will do nothing to boost the strength, flexibility or resiliency of the overall economy.
Deposit Insurance
As of the end of the Japanese fiscal year on March 31, 2003, all deposits of more than 10 million yen ($84,000) -- totaling some 300 trillion yen ($2.5 trillion) -- were set to lose their federal deposit insurance. Considering the atrocious state of Japan's banks -- beset by numerous bad loans and an inability to make new ones -- this reform would have led to a mass capital flight either overseas or under mattresses. So Koizumi either exempted banks from the change altogether or watered down the conditions to keep the status quo.
Disposal of Bad Loans
The willingness to give way on the deposit insurance issue also paves the way for a policy cave on Koizumi's final major reform promise: forcing banks to dispose of their bad loans by 2004. The problem is that the banks are already technically insolvent.
Since the government directed past (and some would argue present) infrastructure development, banks granted loans with little concern for projects' profitability. Yet Japan's unwillingness to force defunct firms into bankruptcy has only encouraged banks -- with an unofficial wink from regulators -- to grant dead firms fresh credit. The result is an ever-growing mountain of bad loans.
Now banks are terrified of granting new loans to new clients lest they compound the problem, but they have to keep failing clients on life support or suffer a complete collapse of their loan portfolios. Consequently, overall lending has not risen in 81 months.
Japan's Financial Services Agency estimates that those dud loans now total 52.4 trillion yen ($441 billion), up 22 percent from a year earlier. Clearer-eyed independent estimates put the real number closer to 240 trillion yen ($2 trillion). Koizumi has a choice: either force banks to dispose of the bad loans and trigger a banking collapse, or wriggle out of yet another promise.
Judging by his past performance, Koizumi looks set to follow the path of his predecessors and simply continue managing Japan's slow-motion economic implosion. |
