Asian Economic Tremors Finally Register In Japan

January 8, 1998 • Commentary
This article appeared in Copley News Service.

TOKYO — As economic instability roils East Asia, people are glancing nervously at Japan. South Korea’s travails are serious, but Seoul remains a modest international player. Japan, in contrast, has the world’s second‐​largest economy. Should Tokyo take a dive, few nations would escape the consequences.

A decade ago, Japan was flying high. It was selling exports abroad and enjoying prosperity at home. At the height of the so‐​called bubble economy, the real estate in Tokyo alone was worth more than all the land in America.

But the bubble burst. In 1989, Japan’s Nikkei average was more than 40,000; it is now about 16,000. Property prices plummeted and banks amassed a mountain of nonperforming loans. Cozy corporate relationships degenerated into financial black holes.

The Japanese political system refused to adapt, however. Interest groups defended their privileges, like subsidized credit, preferential distribution systems and public sector pork. Prime ministers and cabinets changed, but an aloof and impermeable bureaucracy continued to set policy.

Nearly a decade of slow growth later, however, America’s strong economic performance offers obvious lessons. Only greater economic freedom is likely to pull Tokyo out of its present doldrums and prepare it for the challenges of the 21st century.

If Tokyo wants to restart its growth machine, it needs to implement far‐​reaching economic reforms.

Reform has been made more urgent as Japan’s neighbors hit the economic wall and big firms, like the Yamaichi Securities Co., began to collapse. Naoki Tanaka of the 21st Century Public Policy Institute estimates that as many as one‐​fourth of the 2 million people working in the financial sector could lose their jobs when the stock market is deregulated next spring.

Moreover, Japan’s banks possess as much as $600 billion in problem loans. To its credit, the government is allowing institutions to fail. But the process will still be expensive, with Prime Minister Ryutaro Hashimoto planning a $77 billion bailout.

In an attempt to spur economic growth, the prime minister surprised his country (and Cabinet) by announcing a $38 billion package, mixing individual income tax cuts, business tax reductions and public works spending. Much more dramatic change is not only required, but expected. Nevertheless, the details — and speed — of reform remain at issue.

For this reason, Hirotsugi Koike, a columnist for the Nihon Keizai Shimbun, warns that one “can’t expect too much” on deregulation. Interest groups that were once cowed by the prime minister’s popularity now seem ascendent. He was, for instance, forced to retreat from privatizing the postal system’s savings bank and insurance business (with about $2 trillion in deposits and $800 million in assets, respectively). Alas, the post office, which funds pork‐​barrel projects, retains powerful friends.

On the positive side, Japanese business, which once seemed satisfied with the status quo, is fighting for reform.

For all of its troubles, Tokyo remains a formidable economic power. Japan maintains a strong, high‐​tech manufacturing base and possesses $224 billion in gold and foreign currency reserves, insulating it from the sort of panic that enveloped its neighbors.

Says Seiichi Kondo of the Ministry of Foreign Affairs, the present reforms are intended “to make Japan more like America, more consumer oriented, more transparent.”

If Tokyo wants to restart its growth machine, it needs to implement far‐​reaching economic reforms. And it needs to move quickly.

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