Japan
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Try, Try Again
By SEBASTIAN MOFFETT
TOKYO -- Japan's economy appeared on the brink of disaster in September. The International Monetary Fund forecast the nation's economy would shrink 0.5% in 2002, its first-ever second straight year of contraction. Stock prices hit a 19-year low, plunging to less than a quarter of their 1989 bubble-economy peak. And for the first time ever, an auction of benchmark 10-year government bonds failed to find a full complement of buyers-particularly worrying after Moody's Investors Service in June had lowered Japan's sovereign credit rating to single-A-2, below that of Botswana and other developing countries.
Then, just like in Japan's other recent crises, economic leaders took action before it all went too far. First, the Bank of Japan announced a proactive -- if bizarre -- scheme to buy stocks from the country's ailing banks, whose weakness has been one of the greatest causes of Japan's decade-long slowdown. Next, Prime Minister Junichiro Koizumi fired Hakuo Yanagisawa, his financial services minister, and replaced him with the reform-minded economics minister Heizo Takenaka, who also retained his old job. Mr. Takenaka immediately announced he would set up a special task force to tackle the country's bad-loan problem, sparking hopes that Japan might be taking the first steps out of its huge financial jam.
Striving for Consensus
Whether Japan is on the verge of resolving its problems remains to be seen. Japan's consensus-minded leaders have yet to conclude lengthy consultations aimed at balancing a gamut of conflicting interests, many of them pet projects for ruling party politicians.
The result? An ambitious, reforming prime minister like Mr. Koizumi can make some progress toward dealing with the country's complex and debilitating problems. But all too often, he has found himself tied down like Gulliver by the Lilliputians, and thwarted in his efforts to execute the radical surgery Japan needs.
One theory to explain the endless cycle of near-disaster and reaction is the CRIC cycle, proposed by Morgan Stanley economist Robert Feldman. According to this, Japan moves through a cycle of crisis, response, improvement, and complacency -- which then leads to another crisis. The first happened in 1991-92, when the bubble economy finally collapsed, destroying equity prices and stalling growth. Another came with the Kobe earthquake and currency surge of 1995, when a dollar would buy only 80 yen at its peak, punishing exporters' bottom lines. A third arrived with the financial crisis of 1997-98, when growth again collapsed and Long Term Credit Bank of Japan went bust.
Japan: Economic Overview
The most recent crisis this year followed gradually diminishing expectations for growth and reform over the first year and a half of Mr. Koizumi's cabinet. Mr. Koizumi came to power determined to pursue an aggressive program of structural reforms. "There will be no economic recovery without reform," went his slogan, which at first gained him 80% approval ratings. He planned to push companies to restructure. He pledged to clean up the debt-ridden banking sector. And he talked about eliminating or privatizing wasteful semipublic corporations that suck funds from household savings and government revenues that the private sector could have put to better use.
But though government panels did produce a variety of blueprints for reform, Mr. Koizumi failed to execute these as quickly as promised. Moreover, his enthusiasm for reform on all fronts distracted him from perhaps the most crucial issue now facing Japan -- bad loans held by banks that grew to 52.4 trillion yen ($418 billion). By continually rolling these over to keep alive client companies who should, by market logic, have folded, the banks became incapable of performing their essential role of lending to business.
Meanwhile, a sustained shortfall in demand kept the country mired in deflation, as people held off spending money in the expectation that prices would continue to fall. Central bank Gov. Masaru Hayami maintained interest rates at record-low levels, but he stopped short of naming an explicit inflation target. Prices have shown no sign of rising.
The effect was a muddle -- through approach that has characterized Japanese policy for the past decade or so. Part of the explanation for the complacency is the invisible nature of Japan's slump. To be sure, profits, retail sales and land prices have slid, while bankruptcies, unemployment and bad loans have taken off. But while the economy worsens on paper, society has shown few signs of crisis. Homelessness and joblessness are rising, but still relatively mild by world standards. Instead of poverty and crime, the streets of downtown Tokyo have featured long lines outside the world's largest Louis Vuitton store, which opened in September.
Meanwhile, economic indicators deteriorated so far that it looked like Japan might be heading for a financial implosion. Corporate earnings have been crushed. Gross domestic product shrank for three straight quarters, and though it recovered in April-June 2002, growth was sluggish and heavily dependent on export markets-just as growth slowed in the rest of the world economy.
Ripple Effect
Concern over government policy even rippled into the bond market, which had been serving as a refuge for angst-ridden investors. The Nikkei 225 Stock Average briefly dipped below 9000 and ended the first half of the April 1 to March 31 fiscal year at 9383.29. That was 15% lower than six months earlier, and implied valuation losses on banks' stockholdings of 3.5 trillion yen-bringing them close enough to a capital shortfall to make them reluctant to take losses writing off bad debt.
Mr. Koizumi has held on to his job, however, because the public sees him as the best hope there is for badly needed reforms. Opposition parties remain weak in opinion polls and unfocused in policy, while his own party contains no obvious candidates for his replacement. He also proved himself a competent international statesman when he visited Pyongyang and obtained a historic admission and apology from North Korean leader Kim Jong Il over the abduction of at least 13 Japanese nationals in the 1970s and 1980s. The toughness and dignity he showed on this trip produced another surge in his popularity, which secured the power base he needed to install a reforming head of the Financial Services Agency, which watches the country's banks.
Now, the big question is whether Japan can bolster its banking system enough so it can restart crucial lending to businesses, or whether the country falls into complacency again.
"They don't need to just fix the banks," says ING Financial Markets economist Richard Jerram. "They need to give them a future."
--Mr. Moffett is a staff reporter in The Wall Street Journal's Tokyo bureau.
Write to Sebastian Moffett at sebastian.moffett@wsj.com
Updated October 28, 2002 |
