TCS Daily

Japan's Economic Comeback?

By Hans H.J. Labohm - January 10, 2005 12:00 AM

In the middle of the eighties, Japan was considered to be one of the most dynamic economies of the world. Japan's economic growth substantially exceeded that of both the US and the European Union (EU). In the nineties Japan's growth faltered and the US and Europe gained the upper hand. This period is seen as a lost decade for Japan. What went wrong?

It all started in the second half of the eighties when Japan embarked on a policy of monetary expansion, partly as a contribution to stimulating the world economy which was wavering at that time. The underlying thought was that demand-boosting in Japan would lead to a reduction of its big trade surplus, which was considered to be one of the major problems. In 1986/ 87 the Japanese Central Bank lowered its official interest rates in several successive steps. This triggered an unprecedented boom in the stock and property markets. The Nikkei rose from 10,000 in 1985 to 40,000 in 1990 (today, January 2005, the Nikkei is at 11,500). Consequently, the Japanese not only began to spend more on consumption, they also started to invest more, which led to overinvestment. In the first quarter of 1991 the bubble burst and the Japanese economy crashed. It was a classical example of man-made economic disaster as a result of the application of Keynesian recipes.

Some years before, after the collapse of the Soviet Union with its command economy in 1989, Japanese economists joked that Japan was still the only successful socialist economy in the world. What was meant to be humour at that time subsequently got an ominous ring.

In Western eyes Japan is predominantly perceived as a free market economy: a somewhat awkward one, but nevertheless ... We still do not understand why the Japanese economy has not quickly recovered, like is happening in many other market economies after a recession. This suddenly changes when we stop thinking of Japan as a free market economy and perceive it as some kind of a centrally planned economy: a somewhat curious one, but nevertheless ....

In his fascinating book, 'Beyond Capitalism, The Japanese Model of Market Economics', Eisuke Sakakibara explains the particular character of the Japanese economy. It is not based on the sovereignty of the consumer as is the case in Western market economies, but based on what is called anthropocentrism or 'peoplism'. The concrete expressions of this are: employee sovereignty within the corporation and an emphasis on the independent, land-owing farmer in agriculture. Another well-known author, Saburo Okita, has put it like this: 'There are many rooms in the house of capitalism. Japan may occupy some kinder, gentler middle ground between a centrally planned economy and a laissez faire market driven economy.'

After the World War II, Japan set out to rebuild itself as a land where everyone was equal. It established a system of taxing the wealthy and subsidizing the poor, hoping to eliminate the highs and lows and create a society where everyone was comfortably in the middle. That vision largely has come true. 'Modern Japan is almost neurotic in pursuing economic equality and has achieved it to a degree not achieved anywhere else,' said Taichi Sakaiya, a prominent author and commentator on Japanese society, in his book 'What Is Japan?' And the economic analyst Kimindo Kusaka concludes: 'Japan is more of a semi-socialist society than a capitalist country.'

In short, equality takes precedence over efficiency and collectivism prevails over individualism. But only few Japanese are aware of the fateful absence of individualism, which is an indispensable ingredient of the market economy and which is so decisive for its performance. I have only met one exception, the Japanese economist Sahoko Kaji of the Keio University in Tokyo, who once sighed that when the United States, after WW II, taught the Japanese what the market economy was about, they forgot to teach them how to become individuals.

Yet, there seems to be now light at the end of the tunnel. Japanese economic growth has become positive again. As Dennis Tachiki, a prominent Japanese/American economist, points out: '... as long as Japan's latent growth rate stays within a 1.0% to 2.0% band, its economy should steadily recover ... '

As regards economic policy Tachiki underlines that since coming to power in 2001, Prime Minister Junichiro Koizumi has been resolutely targeting three major issues in order to revive the decade long stagnant economy. The first issue was reducing the enormous burden of non-performing bank loans. His second target was resolving the fiscal deficit and the mounting public debt, which is at 160% of GDP, the highest among the developed countries. The third issue was reducing the state's role in society, where it regulates approximately two-thirds of all domestic economic activity.

The mountain of non-performing loans is currently slowly declining to manageable levels. Consequently credit rating agencies are already upgrading the ratings of the major banks.

Progress on the fiscal deficit front is still inadequate. Though the nascent economy recovery is providing more tax revenues than projected last year, it is still not enough for the government to wean itself of issuing sovereign bonds again in FY 2005 and most likely until after FY 2007. However, according to Tachiki, the public debt problem is less serious than often thought, since most of this debt is short-term intra-government debt and another sizeable portion is accountable to quasi-government agencies. Seen in this light Japan's 'net' fiscal debt decreases from 160% of GDP to around 45%.

As far as regulation is concerned Tachiki recalls that for many decades an 'iron triangle' of bureaucrats, politicians, and business elites skilfully managed economic policy to 'steer' the Japanese economy. But it is now obvious that this arrangement is failing to maintain Japan's competitiveness in the 21st century. Consequently, prime minister Koizumi is committed to reform the 'iron triangle' in order to allow market forces or 'civil society' to play a greater role.

Another interesting development is the establishment of a wave of new business ventures in the Internet-related sector, which is often referred to as 'Bit Valley'. This name has been derived from the English translation of Shibuya, the hip Tokyo neighbourhood where many of Japan's Netrepreneurs are headquartered. Shibuya means bitter valley, but this has been shortened to the more digital-sounding 'Bit Valley', the equivalent of New York's Silicon Alley. Even Japan's conservative politicians and change-averse bureaucrats now agree that Japan needs to nurture risk-takers if it wants to be competitive in the Net Age. Of course these ventures are primarily the result of demand pull factors. But they are also fostered by supply push forces. Because of the recent recession, large Japanese companies are no longer able to attract the nation's best and brightest with promises of lifetime careers. The result is that students and managers have decided to take a chance on risky start-ups. All this seems to herald an emerging individualistic entrepreneurial spirit and might imply that Japan is edging now towards a more western-style free market economy.

All in all I put my bets on an economic come-back of Japan.



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