From the NY Times today, an insight into the Japanese crisis. Looks like it won't be over soon!
(This also gives us thread junkies SOMETHING to read)
July 8, 1998
A Crisis? Don't Tell the Japanese
By RICHARD KATZ
magine American voters rewarding a political party that presided
over eight years of stagnation, doubled unemployment, eroded
everyone's retirement nest eggs and offered no foreseeable recovery.
Yet this is exactly what Japanese voters are expected to do in
parliamentary elections on Sunday. If Prime Minister Ryutaro
Hashimoto's Liberal Democratic Party does prevail, as expected,
Japan's leaders will be reinforced in the belief that "muddling through"
remains the best way to retain power.
Hashimoto's popularity is down to 28 percent, and in a high-turnout
election, the party would probably lose seats. But confidence in the
divided opposition parties is even lower, so disgruntled citizens are
expected to stay home.
The L.D.P.'s projected "victory" illustrates why the road to reform will
be a long one. Instead of making real changes, the Japanese system
spreads the pain. Companies with low sales don't cut jobs; they trim
everyone's pay. Rather than foreclose on insolvent borrowers, banks
often lend them the money to pay off interest or provide life support to
stave off bankruptcies.
This approach has led to economic stagnation but also kept people
from being thrown into the street. The recently announced "Total Plan"
to fix the banking system is another instance. Despite claims to the
contrary, taxpayers' money will be used to keep insolvent institutions
and borrowers afloat.
What Japan needs to do is rid itself of bad bank debts now estimated
at $1 trillion. That's 30 percent of the gross domestic product, 10 times
the relative size of America's savings and loan crisis in the early 1990's.
The only effective course for Japan now is the one the United States
took then: to close insolvent banks and compel solvent ones to sell off
their bad assets while protecting depositors. In addition, Government
money should be used to shore up the capital base of the solvent
banks.
But Japan is unlikely to do this, because it would require foreclosures,
bankruptcy and mass unemployment. And the industries most affected,
construction and real estate, provide much of the campaign money and
voter base for the L.D.P.
There are dozens of other industries also protected from competition.
But dismantling informal cartels as well as removing barriers to imports
would eliminate an estimated 10 million jobs, and it would take time
before reform created even more new jobs. Unfortunately, the
Japanese system lacks the social safety net required for such an
overhaul. Its unemployment compensation and its deposit insurance
systems are underfinanced.
Moreover, its labor market is incapable of rapidly shifting large
numbers of workers from the disappearing jobs into new ones.
The problem is that putting off reform is raising unemployment anyway,
from 2 percent in 1990 to a record 4.1 percent now, on the way to
8-9 percent within a few years.
A surprise protest vote on Sunday would send an important message
of discontent, perhaps forcing Hashimoto's resignation. But with only
the upper house of the Japanese Diet at stake, the Liberal Democratic
Party would still retain control.
Like a recalcitrant heart patient, Japan resists the doctor's orders.
Forthrightly addressing its problems may be a difficult regimen. But the
longer Japan waits, the more drastic the surgery will be.
Richard Katz is the author of "Japan: The System That Soured."
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