Economic recovery in Japan
Herbert London
August 31, 2003
Japanese politics is a metaphorical Kabuki production. All that you see cannot be believed and the moment you think an understanding is reached, a new set of conditions emerge.
Most Americans find kabuki and Japanese politics inscrutable. Yet it is also true that the two economies are inextricably linked. Since April 2003, the Nikkei Index has increased 27 percent in virtual lock-step with the S & P 500. It is apparent that the Bush administration is eager to see sustained improvement in the Japanese economy and realizes that the yen - dollar relationship is one variable in meeting this goal. That explains why a high level Japanese economic delegation led by Prime Minister Koizumi's chief economics adviser, Mr. Takanaka, will soon be meeting with the Secretary of the Treasury and Chairman of the Federal Reserve along with other economic advisers to President Bush.
In March 2002 I had the opportunity to engage Prime Minister Koizumi in an extended discussion. My impression was that he was forthright, determined and strong-willed.
In fact, at that meeting I described him as Japan's Iron Man, a clear analogy to Margaret Thatcher and her extraordinary role in England's economic recovery.
Yet now as I travel through Japan more than a year after my meeting with Mr. Koizumi, I find that the Iron Man has been subdued by the Iron Triangle - banks, corporations and members of the LDP (Koizumi's party) resistant to reform.
With the Nikkei Index rising by 27 percent since April many in the Diet contend reform isn't necessary. After a decade of living in the dark cavern of recession signs of light are seized upon. However, despite the season of hope, some of the positive signs are illusory. Challenges clearly lie ahead for the prime minister and the nation.
The two major opposition parties (the Liberal Party and the Democratic Party of Japan) have united in an effort to unseat the prime minister in the upcoming national election. This opposition will campaign on one principle: Koizumi and the LDP haven't done enough for recovery.
This contention may be correct, but the average person in Japan still lives well and, as yet, sacrifice has not been demanded of him. At some point, however, reform will unquestionably translate into sacrifice. With national debt at 140 percent of GDP it is only a matter of time before government pulls the plug on the "walking zombies" - banks that haven't any assets and corporations overwhelmed by debt.
Non performing loans will have to be accounted for and unemployment will rise to unprecedented levels. Moreover, some pension funds may be wiped out leaving a generation of pensioners scrambling for benefits. The unfunded pension liability is in the trillions of yen.
This description of Japan Inc. isn't original. Koizumi understands the problem as do members of his own party. The issue is overcoming vested interests, i.e. challenging the very same party people who offer the prime minister support.
While it would be advantageous to tackle the problem head-on now rather than later, there is an election to consider and a formidable opposition waiting in the wings. The Iron Triangle isn't about to bend to the forces of change and Koizumi, with all his personal fortitude, is not about to challenge the old guard in his own party. Hence a stalemate exists that might represent an opportunity for the newly organized unified opposition.
As I see it, the problem in Japan is daunting, but not insuperable. If politicians could awake to current realties they might accelerate the institutional reforms that are necessary. Poised just over the horizon is technological wizardry that will give Japan an enormous economic boost. For example, Japan has the world's fastest computer; Toyota will soon be producing the world's first "crash free" car; Japan has a significant edge in nanotechnology; a new generation of wireless phones will do everything except the fox trot and Japanese scientists have made significant breakthroughs in finding a cure for Alzheimer's disease and dementia, cures that will find a gigantic market in a portion of the globe that is aging rapidly.
Japan is producing high end products the world wants, but a staggering debt and looming liabilities act as a drag on a nation that could engage in a second take-off stage. I am aware that Wall Street has written off Japan and just about every asset manager I know is underweighted in Japanese securities. Surely, there are valid reasons for the pessimism.
Yet there is this economic giant that could awaken from its slumber, if only the politicians will provide a log-jam breaking wake up call. In my judgment, it was probably premature to argue the Japanese sun is setting, albeit political events in September could be an important determinant in assessing the validity of this assertion.
Perhaps Japan is going back to the future. Could 2004 represent a return to the 1980's? Occasionally cultural signs have predictive quality. In the area of Roppongi in Tokyo there is a wave of 1970's and 1980's nostalgia with new disco clubs opening every few weeks. The patrons who dance to the beat of this music from the past are not twenty year olds. They are the members of a generation that can recall Japan Inc. at the top of its game.
When asked about this phenomenon, most of these middle aged dancers contend they want to remember a time when hope was in the air and the future had lights synchronized in green. I don't know whether Mr. Koizumi, an aficionado of popular culture, attends these clubs. It certainly wouldn't surprise me. Now if only he would act on the spirit these clubs convey the Japanese sun might be on the rise.
Herbert London is President of the Hudson Institute, John M. Olin Professor of Humanities, NYU, Author of the recently published book Decade of Denial, Lexington Books. He's reachable through www.benadorassociates.com .
©2003 Herbert London |
