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Monday, Dec. 30, 2002

JAPANESE PERSPECTIVES

2002: A year of lost reform opportunities


The year 2002 was the year of the horse. It was also a year of lost opportunities. A year, in fact, of shutting stable doors after the horses have bolted. Or rather trying to shut them, and failing to do even that.

There were at least two opportunities which, had they been seized, could have opened the way to genuine progress in the structural reforms that we have heard so much of these past months and years.

The first such opportunity came in March this year. Remember all that panic over the "March crisis?" The worry was that with the yearend financial reporting period approaching, people would rush to dump the shares of ailing companies and trigger a meltdown in the stock market. The crisis turned out to be a nonevent, and everybody heaved a sigh of relief.

How was the crisis prevented? By applying the iron fist of intervention on the stock market, a place where the invisible hand of economic forces should be allowed the freest reign. The clamp down on short-selling that was introduced at the time was the most blatant form of market intervention yet. PKOs, which stands for price-keeping operations, are already a standard term in the annals of Japanese government policy. Yet it really does not go far enough in portraying what actually goes on. PLOs, standing for price-lifting operations, come a lot closer to the real thing. However, with this most recent attempt to go against the tide of market forces, we seem now to have entered the realm of PMOs: price-manufacturing operations, that is to say.

Fabrications of this kind pose great dangers for the health of any economy. Indeed, they are a way of preventing people from knowing how well or sick they actually are. For the market is the thermometer that tells you the economy's temperature. Is it running an inflationary fever? Is it close to deflationary death? The marketplace is where you get to know these things. Or would get to know them if the marketplace was allowed to do its job. Once the thermometer has been tampered with so that it indicates normal temperature at all times irrespective of what the actual conditions may be, we are in great trouble. The danger then is that we will go head-on into a crisis without knowing how badly ill we are. That is clearly very bad for our health. It is also very bad for our wealth.

It is because people felt the threat to their wealth, that around the time of the would-be March crisis, ordinary private investors and depositors started to take money out of yen-denominated accounts and to shift them into foreign-exchange denominated ones. This was what really frightened policy makers into vigorous PMOs. Yet those asset shifts, had they been left to their own devices, would have done much to enforce truly needed structural changes.

The second lost opportunity was the occasion of Mr. Heizo Takenaka's appointment to head the banking reform program. Had he been true to his initially much-quoted sentiment that no companies are ever too big to fail, we could have been out of the PMO-type quagmire by now. As it is, we are about to be force-fed a diet of increasingly autocratic and increasingly elaborate schemes for the government to pick winners and losers among both banks and nonfinancial companies.

The horses of opportunity having thus bolted, we are left with sheepish grins on our faces as the woolly animal takes over to represent the new year. Meek as it is, the hope is that it will bring us some consolation for the frustrated hopes of 2002.

Noriko Hama is an economist and professor at Doshisha University School of Management.


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