Japan’s Economic Future :: Herbert I. London

If one relies on conventional opinion Japan, the second largest economy in the world, is flirting with disaster. It has been argued – with compelling evidence – that the country’s banks and businesses are in such dire shape that the economy could face a systemic crisis.

Time and again since 1991- when the Japanese “bubble” burst – Japan’s banking system and financial markets threatened to spin out of control, only to be reined in at the last moment by dramatic government action. Yet the core problems of deflation, non-performing loans and an enormous debt burden persist.

Glenn Hubbard, chief economist for President George W. Bush, described recent Japanese government intervention as little more than a “Band-Aid.” Because Japanese companies, particularly banks and insurers, have very large portfolios of shareholdings, a stock plunge of the kind experienced in the Nikkei Index in recent years has resulted in debilitating losses. Moody’s rating service may downgrade the ratings of Japanese banks, thereby undermining confidence in lenders.

Years of writing off losses from soured loans have drained the resources of Japan’s largest banks, a condition that could trigger panic among depositors and foster the placement of savings in mattresses rather than savings accounts. Time deposits at banks were down eight percent from a year ago suggesting depositors are already moving money to safe harbors.

That said, it would be a mistake in my judgement to conclude that the fate of the Japanese economy is sealed. In my recent meeting with Prime Minister Koizumi, I’m persuaded he understands the reform measures that must be taken to address the problem.

There is a commitment to increase the money supply from the present 3.5 percent to about 7 percent, despite opposition from the president at the Bank of Japan. Fear, perhaps somewhat irrational fear of another bubble, militates against this needed response.

There is also a belief that g.d.p growth is necessary to cope with the debt burden and that growth can be facilitated by reducing corporate and personal income taxes.

And last, there is the realization that the Keynesian fiscal stimulus engaged in for close to a decade has not affected the deflationary spiral and is not an approach that can redress the downward momentum in the market.

These steps and admission represent the path to recovery. Although there are many who resist reform for obvious self interest, and corporate balance sheets do not yet fully reflect the Prime Minister’s reforms, the stock market improved by 20 percent in the last few months and corporate prospects for the end of the fiscal year are more promising than any in the last decade.

Surely economic nirvana has not arrived. But the present positive signs do not tell the whole story about the future Japanese economy. If one considers the technical advantages the Japanese possess in nanotechnology, robotics, solid state computer chips, genetic research among other developments, Japan is poised to be the engine for Asia’s economic take-off in the twenty first century.

First, of course, the Koizumi administration must restore confidence in the future and remain firm in his commitment to reform. When I suggested that the Prime Minister is facing a crisis not unlike the one Lady Thatcher faced in England during the 1980’s, he smiled in assent.

Most significantly, when I noted that she became the Iron Lady because of her devotion to reform in the face of extraordinary opposition and, if he sticks to his guns, he could be Japan’s Iron Man, he nodded enthusiastically.

Just as President Bush has found the mission of his presidency in the war on terrorism and President Reagan found his mission with the rollback of communism, Prime Minister Koizumi has found his mission in economic reform and recovery. I would not underestimate his will in pursuing this goal. He may indeed be Japan’s Iron Man.

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