Japan’s troubles have persisted now for nearly a decade. That the world’s second largest economy and leading net creditor should remain mired in seemingly endless stagnation/recession confounds policy makers and observers around the globe. And their fears over the consequences have deepened since the onset of the developing world crisis in July 1997. It is evident that the United States alone cannot generate sufficient demand to pull the developing world out of the doldrums—that it requires the assistance of other leading economic powers. With a Europe preoccupied for the time being with its new currency, the only sizeable power left to help the United States propel the world forward is Japan. Yet far from being part of the solution, Japan appears to be a big part of the problem.
Complaints about Japan have become numbingly familiar. According to widely accepted conventional wisdom, Tokyo’s inability or unwillingness to come up with a growth-restoring policy-mix blocks recovery in Asia. Japan’s consumers do not spend on imports; its companies, facing weak demand at home and insulated from the pressure of financial markets to exit unprofitable lines of business, dump production abroad, squeezing out developing world competitors. The country’s imploding banking system has become a kind of black hole of global finance, sucking in liquidity that ought to be going to poorer countries to fuel growth. Meanwhile, concerns that a sudden stock market reversal in the United States could bring the American expansion to a halt exacerbate worries about Japan. For without a Japan to pick up some of the slack, as it were, we would truly be staring global recession in the face.footnote1
What particularly frustrates so many non-Japanese is the sense that Japan’s policy challenges, while severe, are neither novel nor mysterious. The policy recipe urged on Tokyo is pretty straightforward: fiscal stimulus and monetary expansion; the closing down of sick financial institutions combined with recapitalization of the rest; dismantling of anti-competitive regulations and cartels; reforms of corporate governance and financial markets that force companies to become more profitable or face bankruptcy or takeover. Most observers acknowledge that this policy mix could cause political difficulties for any government that tried to carry it out. At the same time, it appears no more onerous than the restructuring of the American economy in the 1980s or the measures implemented in a number of European countries in order to qualify for membership in the euro bloc. Japan’s failure to act seems to boil down to a simple lack of political courage.
The result has been increasingly testy foreign pressure on Japan—much of it, although by no means all, emanating from Washington. It is common knowledge that the Japanese elite often relies on so-called gaiatsu (foreign pressure) to provide political cover for unpopular but necessary change. Indeed, the June 1998 meetings in Tokyo of central bankers and deputy finance ministers from eighteen countries are a case in point. Japan found itself totally isolated, pressed on all sides to take the necessary measures to stimulate its economy and heal its banking system. The meetings may have even contributed to the ruling Liberal Democratic Party’s (LDP) losses in the next month’s elections for the Upper House, and the subsequent replacement of the Hashimoto cabinet with a cabinet under Prime Minister Keizo Obuchi that gave the initial impression of being prepared to do what it took. Certainly, much of the impetus behind the sixty trillion yen bank bailout package, the seventeen trillion yen stimulus package, and the de facto nationalization of several important banks can be traced to these meetings. Yet they were actually arranged by Japan’s Ministry of Finance (MOF), leading to accusations in the Japanese media that they had been deliberately staged to produce a loud chorus of foreign pressure on Japan, thereby providing political cover for an about-face by Japan’s policy elite.footnote2
More, however, lurks behind the exasperation with Japan—at least in Washington—than simple resentment at having to play the perennial heavy in an unending political drama that a supposedly mature industrial democracy should no longer need to stage. Indeed, if gaiatsu were all it took to elicit the changes Washington wants to see, Larry Summers and Bill Clinton would no doubt be happy to endure the painless—for them—slings and arrows of the Japanese mass media in applying whatever pressure is required. Japan’s is not the first government—nor will it be the last—to find foreign pressure a convenient cover for implementing much-needed domestic change: witness the deft ends to which the Italians have employed the Maastricht Treaty obligations, or South Korean President Kim Dae Jung’s handling of the IMF requirements imposed on his country. Rather, what seems to produce widespread indignation with Japan—and this indignation is certainly not confined to Washington—is the sense that the Japanese elite does not realize how bad things are, that it is kidding itself. How else to explain the incredulity with which the consumption tax increase of April 1997 was greeted in policy circles—what are these people doing raising taxes? Don’t they know their economy is flat on its back? Or the increasing shrillness with which well-known economists such as Paul Krugman and Andrew Smithers berate Japan’s monetary authorities from the pages of the Financial Times?footnote3
Maybe we ought to stop for a moment, therefore, and ask ourselves why Japanese elite officials act as if they believe that Japan’s economic plight is not so bad after all. Could it be that they are right; that Japan’s economic situation is not so terrible? This seems like a stupid question. The numbers coming out of Tokyo do not lie. Unemployment and bankruptcies are at their post-1940s peaks. GNP shrank in 1998, and the poor third-quarter numbers for 1999 suggest that the high growth rates recorded in the first half of the year were indeed, as many had feared, simply the one-off products of huge dollops of public spending rather than signals of any fundamental turnaround. Repeated attempts to jumpstart the Japanese economy with such spending have saddled the country with a government deficit which, as a percentage of GNP, is among the highest in the OECD. The Tokyo Stock Exchange languished for nearly a decade in the grip of one of the most vicious and protracted bear markets of the century; even the recovery that set in early in 1999 is simply taking it back to levels that a few years ago would have been regarded as disastrously low. Real estate prices have fallen more than 60 per cent from their late 1980s peak, with no floor in sight; most of the nation’s banks would be insolvent if Japan followed Western accounting standards. And to top it off, we have seen over the past year spikes in both interest rates and the yen. While interest rates have come back down, the forces that led to the spikes are still there; if higher interest rates return or the yen does not soon weaken again, a range of Japanese manufacturers that have been kept alive since the mid nineties on the life support of a weak currency and extremely low interest rates will not survive.
Yet the sense remains that, irrespective of whatever political difficulties may stand in the way of getting the country moving again, Japan’s policy elite doesn’t really think things are that bad. How could this be? Let’s dismiss the notion right away that these people are stupid. Stupidity might serve to explain why they are not doing what Paul Krugman thinks they should do, but it doesn’t square with the facts. This is the same policy elite with the same educational and social backgrounds that guided the country from complete devastation to the front rank of the world’s industrial powers in less than three decades. In any intelligence test one cared to use, the bureaucrats who staff the Ministry of Finance (MOF), the Ministry of International Trade and Industry (MITI), the Bank of Japan (BOJ), and the Economic Planning Agency, together with the upper management ranks of Japan’s corporate and banking hierarchies, could hold their own against their counterparts anywhere. Nor is their information faulty; public accounting standards in Japan may leave something to be desired and outside investors certainly fret at their inability to grasp the real financial situation of Japan’s banks and corporations, but MOF bureaucrats know exactly what is going on inside the country’s financial institutions. For the MOF controls bank funding powers, the opening of branches, the hiring of personnel, and approvals for all financial products. It has engineered every single bank merger since the 1930s. Japanese bankers do very little without MOF blessing; indeed Japanese banks can be regarded essentially as institutions charged with the execution of MOF policies.footnote4