What goes down may not come up


	February 14, 2002	atimes.com

Japan

The leaders of the two largest economies in the world meet for three days in Tokyo from Sunday, February 17, which, in a perfect world, should mark a happy reunion with all the pomp, ceremony, and drum-tight security that mark a summit. Japan's Prime Minister Junichiro Koizumi won praise for pushing hard on his country's peace-bound envelope to aid US President George W Bush in his declared war against terrorism in the wake of September 11. Japan led in efforts to begin repairing a war-shattered Afghanistan. That seems about right for two men who symbolically played toss-ball for the audience after a meeting last year in Washington, DC. But while George rides a victory high and signs of a brighter economy at home, Junichiro faces a stubbornly moribund economy, sharp-knifed political foes of his tough-minded reform plans, and recent polls that bring the once high-flying prime minister closer to earth. In the first part of a pre-summit series, Asia Times Online looks at Japan's Achilles' heal, the economy.

A SUMMIT OF SORTS
What goes down may not come up
By Richard Hanson

TOKYO - Prime Minister Junichiro Koizumi, barely 10 months in office, is being held hostage by an ailing economy and strained markets. Cornered by recent opinion poll setbacks, Japan's feisty political maverick this week is fighting back.

"Never give up" has become the battle cry for an agenda of tough-love economic reform and resuscitation. This week, he summoned what amounts to a crisis meeting of his Council on Economic and Fiscal Affairs, a body created to deal with crises and chaired by the prime minister.

The marching orders: map out a package of anti-deflation measures. That is a tall order indeed. Even the most powerful leader in the world, US President George W Bush, cannot offer much of a rescuing hand-up, let alone a cure, for one of his closest allies during their summit meeting in Tokyo, which starts on Sunday.

Chief among the priorities that Koizumi will explain to Bush are: speeding up the disposal of an out-of-control garbage pile of bad loans held by banks, some of which may need public cash infusions; further boosting by easing money flows to the economy from an already gushing Bank of Japan (the central bank); a token attempt to inject life into a stock market mired around 1983 prices by buying stocks being unloaded, thus maybe also lessening the threat of a currency crisis if investors dump bonds; and throwing a safety net to smaller businesses that are on the edge of failure (Daiei, the near-dead giant retailer, has already been deemed too big to die).

For Koizumi, a staunch Bush supporter in the war in Afghanistan, this is the equivalent of deploying the advance forces of a homeland defense. What the prime minister also is defending is his much-weakened political backside. That has been left exposed in recent weeks by battles over reform, especially public-works spending for roads and other ways of pouring concrete.

Highways, dams and bridges are bread and butter for a large lobby of elected officials, concentrated most heavily within Koizumi's own party, the Liberal Democratic Party. The LDP rules in a loose coalescence of parties and vested interests that mainly think public interest starts and ends with public works.

Last April, the LDP elected Koizumi in a embarrassingly big defeat for former premier Ryutaro Hashimoto. Hashimoto is the current king of the public-works spending mountain and is not happy with reforms proposed by Koizumi that cut into his turf. In such battles, economic sense and reform are often thrown to the wind.

Marshall Gittler, senior market strategist in Japan for Bank of America NA, observes this political maelstrom from his office in Nagatacho, Japan's political heartland, and dubs it "slowing economy, accelerating politics".

Gittler's scorecard on reforms and other economic policies so far this year shows a definite drift toward Nagatacho and away from the adjacent economic-policy-forming bastion of Kasumigaseki, where the Ministry of Finance (MoF), the Financial Services Agency (FSA), and Ministry of Economy, Trade and Industry (METI - once called MITI) - are located.

Koizumi has been battered by non-economic problems, such as a row in January during the Afghanistan reconstruction fundraiser in Tokyo that prompted the sacking of volatile foreign minister Makiko Tanaka. According to the latest polling by national broadcaster NHK, the Koizumi support rate fell to 53 percent in early February from a dizzying (for an elected premier) 79 percent in January.

That is far from a disaster and still surpasses the peaks boasted by other popular prime ministers at this stage of cabinet maturity. But the cold numbers that Koizumi must confront are those for economic growth, which has been dismal for the past decade. The problem is how to confront an unknown enemy that combines a dangerous deflationary spiral (which stealthily destroys wealth) and a shrinking economy (an outright failure to create new wealth).

The latest official bad numbers say Japan's economy will have shrunk 1.0 percent in fiscal year 2001 (the 12 months ending this March), to be followed by zero growth in fiscal 2002, and capped, maybe, by 0.6 percent real growth in fiscal 2003. That year is far away when contemplating the unthinkable nightmare of a financial catastrophe over the next few weeks.

Last weekend, Japan's Finance Minister Masajuro Shiokawa commented bravely to his fellow Group of Seven colleagues meeting in Canada that fiscal 2003 growth might edge up to 1.0 percent. Even that remark was later downgraded by a government spokesman as a "general goal" and no way an international pledge to serve up growth.

"This is bad news," says Mikio Wakatsuki, head of The Japan Research Institute Ltd and a former No 3 ranked official in the Bank of Japan. He allows that "not all is bad" but adds that there is only anecdotal evidence of any good news on the horizon, such as a recovery in the US economy.

The good-news consensus is that Koizumi's government is unlikely to face a meltdown type of crisis before the end of March, despite the images that come to mind of delicate crashing markets, capital flight and currency gyrations, soaring unemployment (already a record 5.6 percent) and natural disasters.

"What people are talking about is what they think is a crisis," says Wakatsuki. "A real crisis comes unexpectedly. Japan will manage through anything like a crisis through the end of March."

For some the dilemma is that Japan has not yet felt a full-blown economic crisis, which is perhaps one reason the public does not appear alarmed by what goes on in politics or the economy. So far laws of economic checks and balances have kept the yen from plummeting to 200 for one US dollar. The stock market has not crashed, but remains limp and far from showing any wildness.

"Big investors don't have the guts to speculate right now," says one Japanese banker. There will always be bottom fishing if stock or bond prices get too far out of whack. Psychologically, the Japanese public is not inclined to speculate, preferring to keep their large wads of money as safe as possible.

"I have an elderly neighbor who acquired a huge amount of inheritance," relates one observer trying to make sense of Japan's conservative ways with its pile of personal savings. "She doesn't trust banks, credit unions, postal savings or government bonds, so she buried it in her back yard." Japanese banks are finding ways of penalizing depositors who keep smallish amounts of money in their deposit accounts, but are far from trying to drive customers away. Good companies are still borrowing. The physical evidence of how contrarian economic behavior is can be seen just about everywhere in the capital, Tokyo. The skyline is in a state of transformation, concentrated in or near the center of the city.

There are no fewer than 18 massive developments slated for completion in 2002 through and beyond the year 2005, according to a survey by the Asahi Shimbun. That includes large infusions of highrise residences that are selling briskly.

Real-estate developers didn't think there was such demand and complain that they should have set prices higher. Realists predict that the building boom in the middle of a recession of unknown length is a formula for future gluts and a further battering of Japan's disastrous property market. Many properties under development were fire sales as the economy turned down. They too may end up swelling the bad loans of banks in the near future.

Windfalls do befall Japan at times. Both of Japan's leading news agencies, Kyodo and Jiji, are moving to shining new headquarter buildings near the pricey Ginza district of Tokyo. They both are flush with cash from the very successful initial public stock offering (IPO) last year by Dentsu, Japan's mega advertising agency. Both had large stakes in that company.

Whether Prime Minister Koizumi's high-stakes economic reform play will be successful is still to be seen. In crude marketing terms, it is about extending his potential shelf life as prime minister in a difficult market. He has missed opportunities to act decisively in the 10 months since he was elected to his position. In real terms, it is about how long Japan can afford to muddle from one economic near-crisis to another. Politics, Japanese pols like to say, is seeing only one step at a time.

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