By Andrew L. Jaffee, November 13, 2003
Posted on 11/14/2003 7:20:51 PM PST by forty_years
| Can Japan Ever Emerge from Stagnation? By Andrew L. Jaffee, November 13, 2003 |
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Japanese Prime Minister Junichiro Koizumi's party, the Liberal Democratic Party (LDP), lost seats in parliamentary elections held last weekend. Elected in 2001 on a pro-economic reform platform, Koizumi has been slow to deliver. Some fear the LDP's election losses will mean even slower reforms.
Remember "Japan, Inc.", the envy of American corporate bosses? Remember when many Americans were afraid that prime property in U.S. downtowns and golf courses would all be bought by Japanese? That was then (1970 - 1990), when Japanese corporations seemed unstoppable and the country's stock market tripled in a 20-year period.
Japan's Nikkei 225 Index (stock market proxy) peaked at 40,000 in 1989 and has been in a downward spiral until this year, when it finally got above the 10,000 level. So what happened to Japan, Inc.?
The Japanese were doing a lot of good things, business-wise, from 1960 through 1980. Their post-war constitution limited defense spending, so government monies were used by-and-large for economic growth. The Japanese embraced new technologies (like industrial mechanization) and placed great emphasis on quality control and cost controls. They were able to take advantage of America's economic decline in the 70's. At that time, many U.S. corporations lost sight of quality control. High-quality Japanese products flooded the world's markets. Japan's economy became the world's second largest, with the U.S. in first place.
During the 80's, Japan's economy ballooned into a bubble, somewhat like America's in the 1990's. Many Japanese bid real estate and stock prices up to unsustainable levels. The bubble burst in 1989. Since then, the Land of the Rising Sun's economy has been stagnant, suffering four recessions just in the 90's. But there was a lot more to Japan's economic collapse than just high property and stock prices.
Government and business got too cozy during Japan's heyday. The lines between public policy and corporate governance became blurred. Government made a lot of decisions based on good 'ol boy connections. Too many large corporations also became intertwined -- so much so that they held large equity stakes in each other's companies (this practice is known as "cross-shareholdings"). As stock prices plummeted, company assets shrunk. Since most everyone was holding everyone else's stocks, most companies' balance sheets became very unhealthy. Note: a balance sheet is a summary of a company's assets and liabilities.
Companies were too heavily shielded from competition and got soft (and rotten to the core). Middle management became over-bloated and too comfortable. Japanese banks held massive stakes in real estate and stocks. As asset values fell, bank balance sheets fell to pieces. Bank lending, a primary fuel for economic growth, evaporated. This spiral has continued for almost 13 years. Unemployment has reached levels many Japanese are unaccustomed to.
The end result was that bad companies were propped up by competitors and/or government. Government's remedy for economic stagnation has been to borrow huge sums of money and pour it into so-called public works projects. According to the BBC:
The result has been some very well-equipped - if often unnecessary - regional infrastructure projects, but relatively little of the money spent reached those who have been made unemployed.
Much of it has in fact gone into the coffers of Japan's huge construction companies, which have very close links to ruling party politicians. ...
And the massive outlay means government borrowing has reached 130% of GDP, higher than any other industrialised country.
So what's the prescription for Japan's economic ills? The Japanese should be studying America's corporate reforms of the 80's and 90's. Serious structural reforms are needed in both corporations and government. Corporations need to face economic competition and flourish or fail based on their strengths or weaknesses. The good 'ol boy network between politicians and businesses and between businesses and businesses needs to be unwound -- but not completely. Healthy cooperation between businesses (partnerships and alliances) is a good thing when done right. This is true for cooperation by business and government, as long as politicians and executives don't spend all their energy lining their pockets. Corporations need to slim down, hiring people as needed instead of hiring them for life no matter how they perform. Government needs to cut spending.
Finally, Japanese banks need to clean up their balance sheets by writing off bad loans. In other words, they should forgive the loans (since there's no hope of payment), and reflect the loans amounts as losses on their financial statements. The banks don't want to do this, but Japan will never recover without a banking system that reflects reality. Some banks will fail once they recognize bad loans, but you either have a free market or not. The government has allocated some funds to help banks do this, but many pundits argue they've not done enough. What's needed is something like the U.S. government clean-up of the S&L (Savings and Loan) debacle of the 1980's.
But these reforms will mean short-term pain and long-term gain. Japanese politicians have so far been unwilling to face the short-term pain. But they really have no choice. Japan's economy will likely sink into the Pacific if nothing is done -- despite the very recent up-tick in economic activity.
Last weekend's election results reflect Japanese voter discontent with the ruling party's failure to stimulate economic growth, according to the New Zealand Herald:
The failure of the LDP, a mix of reformists and foot-dragging conservatives, to maintain its own majority was likely to weaken Koizumi's hand against the anti-reformers [in his own party].
However, he appeared likely to stay at the helm of government, given his coalition's overall majority.
The Democratic Party, a generally pro-reform group, took 177 seats, up from 137 but short of Kan's target of 200. ...
The Democrats, for their part, had deployed a detailed manifesto -- including pledges to cut public works spending and loosen the grip of bureaucrats on policy -- to persuade voters that they were the true party of change.
"One thing that stands out is that the Democrats did quite well despite a low turnout. This is a blow to the LDP," said Shuji Shirota, an economist at Dresdner Kleinwort Wasserstein.
"What this tells us is that for the voters, Japan's economic recovery has not been tangible," he said.
Japan has to do something about its economy soon. 13 years of economic stagnation is unbelievable. The failure of the world's second largest economy would affect everyone on Planet Earth.
Did Rome?
Will the USA?
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