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Wednesday, Feb. 13, 2002

Wrong cure for Japan's economic ills


So U.S. President George W. Bush has decided the future of Asia depends on overcoming Japan's puzzling, decade-long economic stagnation. But do he or his advisers understand what is really wrong with that economy?

Japan's No. 1 problem is excessive savings, mainly due to the extraordinary savings propensity of the average consumer. In many ways the willingness of the Japanese to forgo the profligate lifestyle and class-status spending of Westerners is highly praiseworthy. But the fact remains that in today's world, with inflation largely countered and current account deficits largely ignored, the advanced economies show a clear inverse correlation between savings levels and economic vitality, beginning with the United States and the other Anglo-Saxon economies with low savings and high vitality, through to the continental European economies and, finally, to Japan.

Something is urgently needed to break the savings logjam and get funds moving through the economy. Abnormally low interest rates have failed to do this. Compulsory holidays, work sharing or other French schemes, such as those that guarantee older people lifelong services in exchange for assets, might boost spending. But it would be years before Japan's creaky decision-making process could even get round to thinking about such ideas. It will be even longer before Japan agrees to the immigration polices needed to overcome the economic harm from population decline.

Meanwhile, an emotional, antigovernment-waste mind-set rejects the one obvious solution -- a rapid burst of government spending to kick-start the economy, followed by tax reforms to help finance the spending and deregulation to encourage more private investment.

Problem No. 2 is the national propensity for mood-based, lemminglike behavior. When markets are moving up everyone wants to buy. When they go down no one wants to buy. A very sharp kick is needed to break both upward and downward spirals. Instead, Japan fusses over details.

That land prices have already fallen to below economic levels is shown by the eagerness with which smart foreign speculators are buying up distressed assets. Japan's lemming-minded speculators would also move if they were certain prices had stopped falling. But the firm government moves needed to convince them of this are absent. And with the value of the land and shares used as collateral for bubble-era loans still falling, calls for banks to clean up their bad loan situation are meaningless.

Ultimately, the blame for the collapse of Japan's financial industry belongs to the entire nation, not just Japan's inept bankers. Particular blame falls on Tokyo's decision, made under U.S. pressure, to liberalize the banking system in the 1980s -- a decision Japan's "structural reform" fundamentalists still view with great pride. Anyone who knew Japan could have predicted that, freed from close government supervision, the bankers would go berserk. The banking system became a conveyer belt of funds for gangsters, corrupt politicians and mad speculators.

Tokyo should accept all this as history, and quickly pour in the large amount of funds needed to buy out remaining bad loans, regardless of how or why they were incurred. It should then move on with firm resolve to never let the national mood or the bankers off the leash again. In the meantime (as in Finland, which had the same problem 10 years ago), the government could make a killing from the very likely rebound in the value of the collateral it would be buying.

Instead, with much Western approval, Tokyo cuts the funds needed to revive the economy and tries to force those still-inept bankers to confront the bad debt problem by themselves. Lending is cut. More worthwhile firms go bankrupt. More loans go bad. The vicious circles pushing Japan downward gain yet another burst of energy.

In the West, Japan's current bank problems are seen as similar to the U.S. savings and loan scandals of the late 1980s and prone to the same solutions. But Japan's problems today are much greater. They resemble those of the U.S. in the early 1930s, when Americans had also given way to gross speculative excess.

Then, too, there was a strong desire to purge past excesses. But it just made things worse. Ultimately it led to the Great Depression.

Finally we have the national weakness for fine words and meaningless gestures that has created the Koizumi phenomenon. But even in the West, many who should know better have let themselves be mesmerized by Prime Minister Junichiro Koizumi's constant repetition of the "structural reform" mantra.

Koizumi himself knows little about economics; most of his promised "reforms" are political, aimed mainly at political enemies in his own Liberal Democratic Party. So we now have an absurd situation where, in the minds of the mesmerized, those in the LDP who do understand the economy are lumped together with the political enemies as an "evil axis" that Koizumi is supposed to be trying valiantly to overcome.

But even if the Koizumi reforms were for real, the Western view that progress in Japan depends on eliminating faults lacks logic. Japan has long had its faults -- geriatric managers, an inefficient service sector, gangster penetration, self-serving bureaucrats and so on. But they did not stop past progress.

Faults simply prevent an economy reaching full potential. (It was the pundits who focused on Japan's potential rather than its faults who mistakenly predicted that it would overtake the U.S. by the 21st century.) They do not stop the normal progress due to technical and other innovations. The fact that Japan has not made any kind of progress since Koizumi took over, and promises even less in the future, should cause far more concern than it does.

Gregory Clark is honorary president of Tama University, and a member of the "Private Discussion Committee" established in September by then-Foreign Minister Makiko Tanaka to discuss international affairs.


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