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Sunday, Dec. 31, 2006

AN ANALYST'S-EYE VIEW

Daunting challenges face fast-graying nation


Staff writer

Robert Feldman is chief economist at Morgan Stanley Japan Securities, where, as cohead of Japan Equity Research, he is responsible for forecasting the direction of the Japanese economy.

News photo
As chief economist at Morgan Stanley Japan Securities, Robert Feldman must have his finger on the pulse of anything affecting Japan's future. MARTIN WEBB PHOTO

Prior to joining Morgan Stanley in 1998, he was the chief economist for Japan for Salomon Brothers, and before that he worked for the International Monetary Fund.

Born in Oak Ridge, Tenn., Feldman has a Ph.D. in economics from the Massachusetts Institute of Technology, and BAs in both economics and Japanese studies from Yale University. Now age 53, he first came to Japan in 1970 as a high school exchange student, and has lived here continuously since 1989.

Feldman, who is married with one son, is the author of four books, most recently 2005's "Beyond Structural Reform" (published in Japanese by Toyo Keizai), and has translated several books from Japanese to English, including "Economic Growth in Prewar Japan" by Takafusa Nakamura, which was published by Yale University Press.

How is Japan going to cope with its rapidly aging population?

There's only one true answer and a number of sort of supporting answers: The true answer is by raising productivity.

I think that finally there is an understanding [in the government] that the productivity agenda is the agenda for dealing with the aging population issue.

There are two main remedies that have been proposed to combat the potential damage to growth the falling population will cause: One is bringing more female members of the population into the workforce, the other is immigration.

Do you see either of those measures actually being implemented?

Well, the number of immigrants has actually been growing at about 4 percent annually for the last 20 years. That will be part of the solution, but if you calculate how many would be necessary to deal with the demographic problem, the numbers are mind-boggling -- this society is not ready for that. So that's not really going to work.

Regarding female participation rates [the percentage of adult women in the workforce], I stun 95 percent of my clients with the following question: Has the female participation rate here gone up or has it gone down over the last 15 years? Ninety-five percent say up, but the answer is down. It's down because basically the population is aging so quickly. So this is not really a gender issue, it's an age issue.

The key thing is to make sure that people over 65 keep working. That means re-education; improved labor exchanges; improved access to labor-force amenities; and better commuting, easier lifestyle decisions -- stuff like that.

Is Japan equipping its workforce with sufficient skills to adequately maintain its global competitiveness?

At the moment, no. That's a problem. Again, this goes back to the original issue of how you maintain living standards. Higher productivity is really the only answer, so we have to move more and more people into higher value-added sectors, which means more highly educated workers. The education system right now is just not up to the task, and it's not just the schools. Schools are bad enough, but we also need a completely different approach to ongoing education for people in their 30s, 40s, 50s and 60s. And I'm not aware anything particularly groundbreaking is being done there.

How do you think Japan's trade and diplomatic relations with its immediate neighbors will develop in the coming years?

With China, I think things are going to go fine. The two countries need each other. Everybody was upset with the result of the Yasukuni stuff during the Koizumi years. So everybody wants to get that off the plate and deal with it as a separate issue. [Chinese] Foreign Minister Li Zhaoxing and [Japanese] Foreign Minister Taro Aso have put together this history committee; they'll come up with a report and that will be the end of it.I think Prime Minister Shinzo Abe has been perfectly correct in dealing with this. If he wants to go to the shrine that's his business -- as long as he doesn't do it in a way that has detrimental effects on Japan's forward-looking agenda. So I think that will work out fine.

In geopolitical terms I think Kim Jong-Il has done us a huge favor, because if he gets away with what he's doing, Japan will have no choice but to have a much more clear deterrent capability . . . So it's clearly in China's interests to keep the North Koreans under control. Once they do that it becomes much easier to solve the Taiwan problem as well. So I think what's happening is that a deal is kind of working itself out, where the Chinese correct the North Korean situation and [in return] the U.S. and Japan leave China and Taiwan to work things out -- in a peaceful way -- on unification.

Will Japan ever get a seat on the United Nations Security Council?

I think it will, and I think the issue here really has to do with money. The decision by the Security Council, in I think it was July of this year, when they condemned North Korea on the missile tests -- that I thought was an epoch-making event.

What basically happened there was that the U.S. and Japan were very clearly concerned, and the U.S. and Japan together provide 40 percent of the budget of the United Nations, and if the Security Council had said, "No, we are going to ignore your security concerns," then 40 percent of the budget would have been in jeopardy. So for that reason I think the U.N. is now under, shall we say "notification," that unless they do a more effective job on security, Japan is not going to be there at all.

How long do you see the Liberal Democratic Party retaining its half-century grip on power in Japan, and what are the prospects of a two-party system emerging?

I think the LDP is in extremely strong shape right now, in part because the [main opposition] Democratic Party of Japan is still so weak.

I don't think we are going to have any kind of a two-party system emerging until we get some further changes in the representation system that essentially eliminate the smallest parties.

I think we are going to have to have yet another reorganization of the party structure to bring some of the center-left guys and the democrats together with some of the center-right guys in the LDP to form a more solid centrist party.

I do wish we had a more vibrant leftwing party, because the LDP needs help. Every time [former Prime Minister Junichiro] Koizumi needed help, the left wasn't there to help him -- and it should have been. I think we need a more effective democratic party, but I just can't see how that's going to happen.

What do the prosecutions of Takafumi Horie and Yoshiaki Murakami indicate about the future of business practice in Japan?

I think those two cases are largely irrelevant. We'll have to see what the courts say about the specifics of each case, but it's very interesting to see that there's still a huge amount of acceptance, support and praise for a number of the things Murakami did. . . . As I talk to investors here in Japan, a lot of them think he did a lot of good stuff because the managements he challenged for being under-aggressive in managing their business really were.

Do you think the Horie case was politically motivated?

Maybe, maybe not. There are rumors of other factors being involved in it, and we'll have to see. But it's very interesting the attention paid to the Horie case relative to that paid to the Seibu Railways case or the Yubari municipal case. . . . Why is that?

It sounds very much to me kind of like a conspiracy theory, but I think it has a lot to do with money, because if money is going from media interests to politicians, then there's really some investigative reporting that needs to be done. I think the whole issue of the linkages between the press and the politicians, and the yakuza, etc., really needs to be explored in public.

Do you see progress in efforts to tackle organized crime and the black economy?

I haven't seen a lot of signs of progress on that. The way the consumer-finance issue was handled here I thought was very bad, because the main beneficiaries . . . will be the underground lenders. Why nobody in the press or political world came out and said that more clearly was unbelievable. If you want to have conspiracy theories, that's a very interesting one. Because if you want to drive legitimate people out of the market, the yakuza are going to come in. If you know that they're going to make money off it, whose interests are you really serving? So something very weird is going on here.

Unfortunately I don't see any particular drive to push the underground economy out of the picture. Of course nobody in the Diet wants to investigate this because they all have their little connections here and there to the different groups. So I think it's time for people to come out in public and say, "Enough of this crap, let's regularize our system."



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