The economic outlook in Japan is very grim, as brief overviews below [1]
indicate. Right now, Japan has the worst growth outlook in Asia. That is a
surprising fact, if one recalls that this is a country presumably dusting
itself off from the collapse of its own bubble nearly two decades ago.
After such a long period of economic crisis, Japan should be renovated and
ready to thrive. Instead, it may be in worse shape than even the United States
(though clearly not Iceland and much of Eastern Europe). Exports plunged a
record 35% annually in December, while the industrial production figures for
November revealed a record 8.9% month-over-month drop. [2]
Japanese financial institutions were not big players in the markets for
collateralized debt obligations, credit default swaps and the
other toxic assets that have ravaged the capital bases of banks in the US and
much of Europe.
Rather, Japan's key policy failure would appear to be over-reliance on exports
as the engine of growth, while hoping that the fruits of this growth would
trickle down into the rest of the economy and bolster demand.
But in the rest of the economy, deregulation of labor and other markets had
seen firms shifting to insecure employment (especially part-time and
contractual staff) and rolling back pay, thus crimping the level of demand. And
that weak domestic demand was of course blunting domestic-oriented businesses'
incentives to invest (compared with incentives for export-oriented businesses).
With the startling 35% drop in exports in December 2008, it's as if someone
kicked the chair away from a man who was standing on it to test out what it
felt like to have a noose around his neck.
The ruling Liberal Democratic Party and Prime Minister Aso Taro are trying to
assert that the problem is global, a once-in-a-century event. But the pattern
of fallout varies among low toxic-asset countries (especially Asian), notably
in accordance with their degree of reliance on the trade bubble.
Japan seems to be suffering the legacy of the structural reforms of former
prime minister Koizumi Junichiro and financial services minister Heizo Takenaka
in that the reformists were content to rely on exports (stimulated by ultra-low
interest rates) and to use deregulation, privatization and (to some extent) tax
cuts to eviscerate the public sector's role and let the market determine the
strategic focus of the economy.
They were loath to look at the Scandinavian model as a guide to building safety
nets for encouraging labor mobility and laying a strong floor as the basis of
the domestic economy (also by investing in education and encouraging higher
remuneration and professionalization in elder care and other growth sectors).
They disparaged the role of the public sector in framing markets and in
sketching the strategic focus of the overall economy, such as in deciding
targets in energy and environmental areas and thus giving incentives for market
actors to achieve.
Takenaka, Koizumi's neo-liberal brain Heizo still recently trumpeted in the
Japanese weekly, ekonomisuto (economist), the small state and
deregulatory nirvana. Elsewhere he has blamed Japan's current crisis on
insufficient deregulation.
But he and Koizumi were champions of low interest rates, even though these
rates cost domestic savers some 35 trillion yen per year (nearly 12% of their
previous income). This was not only a subsidy to the export industries. Low
rates also helped keep zombie firms (about 20% of small and medium enterprises)
in business, since low interest allowed them to roll over their loans even
though they were effectively broke.
A strategic investment focus from the central government during the Koizumi
"structural reform" years would have put momentum into the recovery on the
domestic side and allowed the ratcheting up of interest rates while softening
the damage from failures of zombie firms that simply couldn't modernize fast
enough as their low-interest security blanket was lifted.
The extra income for savers (from normalization of interest rates) would have
bolstered the domestic economy enough to provide new employment opportunities
to labor and capital shed by many inefficient enterprises and retraining could
have been offered to the hard-core unemployed.
That's all hindsight of course, but it beats the hindsight on offer recently:
many of the newly anti-market crowd are trumpeting "Edo" (old Tokyo) society
and even the Jomon Era (14,000-400 BC) as models for the present, lauding their
closeness to nature, stability, and community values. One Jomon booster is a
former free-market cheerleader who got his economics PhD from Harvard and has
been big in government deliberation councils.
Japan's public debate still hasn't cut through the nonsense of idealizing the
"free market" or the "unique Japanese" and come to focus on what the public
sector of this advanced, industrialized country needs to be doing in the midst
of the worst economic crisis since the 1930s.
Andrew DeWit is Professor of the Political Economy of Public Finance,
Rikkyo University and an Asia-Pacific Journal coordinator. With Kaneko Masaru,
he is the coauthor of Global Financial Crisis published by Iwanami in
2008. He wrote this commentary for The
Asia-Pacific Journal.
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