Japan's giant problem
By Peter Hartcher
If we suppose for a moment that the financial markets
might be right, that after a decade of regular misreadings
they are correct, and Japan's economy is finally
recovering, then the question is: Recovering to what?
From the time the US Occupation forces pulled out of
Tokyo until 1973, Japan averaged economic growth of 9
per cent. And then it averaged 4 per cent until 1991.
No serious forecaster believes Japan is capable of getting
back to even half this level. The Ministry of International
Trade and Industry (MITI) says that with its current
economic structure the country's potential growth rate is
a miserable maximum of 1.8 per cent a year until 2010,
and then a pathetic 0.8 per cent thereafter.
And even that rather desperate pace could be
undeliverable.
The long-range forecast by the Japan Economic
Research Centre in Tokyo, the research arm of the
Nikkei newspaper, says that the national economy will
actually shrink for all but a few of the next 20 years.
Is Japan simply exhausted? "Think of it this way," says
the regional economist for Prudential Securities in Hong
Kong, Robert Rountree. "Britain has been in decline
since World War II. What's the big fuss about Japan
entering the same phase?"
This sort of thinking helps explain what the Japanese
describe as the "fly-over Japan" syndrome – the
increasing tendency this decade for top business people
and politicians to write Japan off and fly directly to the
more fashionable hot spot, China.
John Howard has resisted this urge and today meets
Japan's Prime Minister, Keizo Obuchi, but the question
still preoccupies Japan analysts around the world: why
bother with Japan?
If it is entering a protracted period of stagnation, then is it
worth the trouble to cultivate it? Should John Howard
have flown over Japan directly to his next destination, the
US?
Bill Clinton did something similar last year. He flew over
Japan when, for the first time since the 1970s, an
American president visited China without also calling on
the chief US ally in the Pacific. He later made up for this
omission but the point had registered forcefully in Tokyo.
Clinton's oversight implied that Japan is, to borrow the
jargon of the market, trading at a steep discount to its
face value. It is not only the US's most important defence
partner in Asia and a key member of the Group of Seven
rich industrial democracies, it also boasts an economy
five times the size of China's.
But it is not logical, not sensible and not even possible, to
have a rigidly deterministic view of Japan's future. Why
not? Ask yourself this question: what is Japan?
It is a dribble of small islands with a population the size of
Pakistan's and only half that country's land area. It cannot
support a first-world lifestyle with its own resources. It
can supply only 64 per cent of its people's food needs
and 20 per cent of its energy requirements.
With this natural endowment, it is possible for Japan to
be nothing and yet, it has also shown repeatedly over the
past 130 years that it can do anything. The key to Japan's
past success, the reason it was able to compress into 30
years the development the US achieved in 100, is its
economic structure.
But the "catch-up" structure that made Japan the world's
second-biggest economy is now obsolete. For a new
economic vitality, Japan needs a new economic structure.
Every one of the pessimistic analyses of Japan's future
has a single, core assumption: that Japan's economic
structure remains unchanged. If it is to have any hope of
serious rebound, its structure must change. So what is
happening? Is the restructuring under way?
A Japanese government official or an American funds
manager will tell you that the grand restructuring of the
Japanese economy is well advanced. The official wants
your credulity, the funds manager your money. And they
have a serious case to make.
The evidence in favour of the restructuring story is:
The old policy-making apparatus has been broken up.
The core problem of the postwar policy set-up was an
awesome concentration of power in the Ministry of
Finance.
Because, while the US Occupation forces purged
210,000 officials from the military, the political system,
and the powerful Ministry of Home Affairs at the end of
the war, they purged only nine officials of the Finance
Ministry. It emerged as the dominant, almost unchecked,
force in economic and financial policy making. This led to
many problems, including serious imbalances and
ossifications of policy. These helped produce the
disastrous Bubble Economy of the 1980s.
But angry politicians have now stripped the ministry of
some of its powers. The central bank, the Bank of Japan,
last year won a big measure of independence for the first
time since the 1940s. Supervision of the financial system
has moved to a new agency.
And the balance of power has shifted from the
bureaucrats to the politicians: "We no longer have to
plead with the ministry if we want to create a new fiscal
spending package," says a key political policy-maker in
the ruling coalition, Dr Yoshio Suzuki. "We just tell
them."
A comprehensive program of financial liberalisation has
been set in train. This will have systemic effects. When
there is open competition for capital, its owners focus on
returns. And that should increase the market impulse in
Japan's economy, tearing at the old non-market
structures that have created many of the old rigidities in
the economy.
The banking system is well on the way to being
restructured. The banks had long ago become a liability
to Japan's economy. The postwar US Occupation
wanted to smash up the old commercial banks but was
deflected by the urgency of using Japan to fight
communism. The core banks survived largely intact into
the 1990s. They ran a cartel; they often lent money on
non-market principles and they prevented the emergence
of a modern financial system. But the big 21 city banks
are now the 17 not-so-big city banks and more
rationalisation is under way.
Many sectors of the economy are being deregulated.
The wholesale electricity and oil markets have been
liberalised, for instance.
The US Occupation sought to break up the mighty
prewar conglomerates, the zaibatsu, but only managed
to reorganise them into modern versions of the same –
the keiretsu. These conglomerates, through mutual
support policies, managed to preserve their dominance in
the economy and stifled much change. But now, the
companies in most of these groups are so weakened that
they are no longer able to bail out their most damaged
members. The mutual support system is exhausted.
Many companies, especially the big manufacturers that
have always been world-class competitiors, have recast
themselves to stay at the forefront of the world economy.
Mazda and Nissan have fallen under foreign control.
The management guru Kenichi Ohmae says that he
detects a promising new wave of small start-up firms, the
types of companies that could be the Microsofts and
Intels of Japan's next wave of industrialisation.
These are the arguments that restructuring is real, and
they are powerful. But they are only half the picture.
What the Japanese official or the American funds
manager will not volunteer to you is that, at the same
time, there is a stream of developments taking the
economy in precisely the opposite direction.
Instead of demolishing old rigidities and State-imposed
strictures, these other developments are repressing
market forces, forestalling a market-based reallocation of
Japan's resources. These measures are tantamount to a
creeping socialisation of the Japanese economy. These
are:
The Government has moved decisively into the private
sector to prop up small- and medium-sized enterprises.
Last year it allocated ¥20 trillion ($245 billion) and this
year another ¥10 trillion in credit guarantees for these
firms. More than half a million smaller companies now
enjoy these government guarantees of their debt.
"Now nearly one Japanese company in 10 has its debts
guaranteed by the State," says CitiTrust Bank economist
Nobuya Nemoto, "and they have not been allocated after
careful study of the underlying business, either".
In an effort to help companies that were having difficulty
raising finance, the Government has become the biggest
investor in the market for corporate paper and now holds
one-third of all corporate debt instruments on issue in
Japan.
To stimulate home-building, the Government has
become the biggest single provider of home mortgages
and now accounts for one-third of all outstanding home
loans.
The State, through its own instrumentalities, now owns
52 per cent of the total outstanding stock of its own debt.
The Government has taken over the payrolls of a
record 2,400 companies which are unable to keep
paying their own staff.
Contrary to the Government's declared policy of
deregulation, the number of national regulations in force
continues to rise. In 1986 there were 10,050 national
regulations in force. Today there are 11,050, according
to the Management and Co-ordination Agency, an
increase of 10 per cent.
In some key sectors such as the steel industry, the
Government has forestalled a much-needed
rationalisation by stepping in to lend money to
companies. Two of the five major Japanese steelmakers
now owe more debt to State-owned banks than to their
private-sector bankers.
This is a powerful set of evidence that seems to show the
precise opposite of the restructuring story. It illustrates
that the Government has moved aggressively into the
marketplace to interrupt the play of market forces, to
prevent or delay or dull restructuring of the economy.
So, confronted with two directly contradictory streams of
evidence, how can we make sense of the state of
restructuring in Japan? Are there ways of weighing these
sets of evidence to discern which is heavier, which trend
is winning?
A professor of finance at Kobe University's Business
School and formerly a senior central banker, Kengo
Inoue, says net progress in restructuring can be measured
by the unemployment rate: "Unemployment keeps going
up, so that tells you that restructuring is under way".
Another measure is the level of takeover and merger
activity in the corporate sector. The economist Jesper
Koll points out that the value of companies subject to
merger or acquisition in Japan today is the equivalent of 8
per cent of total market capitalisation, compared to just 1
per cent a year ago.
And common sense says that unless the Government is
prepared to socialise or nationalise the great bulk of the
economy, it cannot prevent market forces ultimately
imposing market-based solutions.
So even while the State-owned banks have sought to
prop up the weakest steel companies, for example, it is
not enough. The biggest steelmaker, Nippon Steel,
declared recently that it wanted to expand its share of the
steel market in Japan by 10 percentage points. This can
only occur at the expense of the weaker firms and must
create intense pressure for the rationalisation the
Government was seeking to prevent.
Finally, future developments must work to advance
restructuring. A looming crisis in the pension system, for
instance, will force many companies and the State to
make major changes. A new consolidated accounts
system kicks in next April and will be a catalyst for much
corporate reorganisation.
So despite the best efforts of the Government to keep the
economic structure intact, serious change is forcing its
way, slowly but inevitably, through the system.
And with a new structure, Japan should be able to make
new achievements. So John Howard need not thank
Obuchi for the renovation of the Japanese economic
structure indeed, he should urge him to get the State out
of the way and let it happen. But in Australia's long-term
national interest, it is just as well that he does not fly over
Japan.
afr.com.au
|
