William Keegan on the real roots of the country's plight: US policy and inept
economic management
Sunday March 18, 2001
The Observer
As the Japanese stock market falls to levels below a third of the peak reached
in 1989 (Nikkei index: 39,915.87), concerns have re-emerged about the
viability of a banking and financial system that is far from 'transparent' and
characterised by cross-share holdings. There is particular concern about the
historic cost valuation of bank assets and the possibility of some kind of
'meltdown'.
The worries of overseas investors were exacerbated recently when veteran
finance minister Kiichi Miyazawa declared that, after years of public works
projects - recommended by, among others, the Americans - the budget position
was 'near a state of collapse'. This is not the kind of thing finance
ministers are meant to say, even when the budget deficit is some 130 per cent
of gross domestic product. Miyazawa later retracted, but the cat was out of
the bag.
This is all a far cry from the mid-1980s, when the Japanese economy attracted
the envy of the world, and even the mighty US was concerned that it had
somehow lost out to Japan's miraculous industrial machine.
Everything changed when the US realised that the - at the time - very strong
dollar was in fact a source of industrial weakness. Via various Group of Seven
agreements, the Reagan administration first devalued the dollar and then
stabilised it.
Central to Washington's international economic policy from then on - under
both Republican and Democratic administrations - was the goal of attacking the
huge Japanese trade surplus, and assuaging the protectionist sentiment that
Japan's economic 'invasion' was arousing in the US.
This involved several successful attempts to drive the value of the yen up to
peaks which would damage the Japanese export effort, as well as repeated
appeals to Japan to expand domestic demand in order to encourage imports.
Ironically, an earlier contributor to all those deficits whose accumulation
now cause such concern was Miyazawa who, as finance minister in the
mid-Eighties, introduced several stimulatory economic packages. He is cited in
Managing the Dollar: From the Plaza to the Louvre by Yoichi Funabashi as
'[enlisting] foreign pressure in an alliance with domestic expansionists to
advance his stimulative policies'. Japan also kept interest rates extremely
low in the late Eighties, thereby encouraging the notorious 'bubble economy'
from whose effects it is still recovering.
There are conspiracy theorists who think the US was in fact attacking two
empires in the Eighties - the 'evil empire' of the Soviet Union, which duly
collapsed in 1991, and the Japanese economic powerhouse, which needed bringing
down a peg or two.
But, in the clichi of the moment, no economy is an island, and there is no
knowing what the repercussions might be if the Japanese economy goes 'down the
tubes'.
However, let us remember that those very tubes would almost certainly have
been manufactured in Japan, to the very highest quality standards. British
observers who are beginning to compare Japan's 'plight' to that of the former
Soviet Union - on the grounds that there has been a degree of centralised
planning which no longer works - are making something of a leap.
Communism produced a 'shortage economy', and exposure to what was possible in
the West contributed to its downfall. People all over the world want Japanese
consumer goods, and two Japanese multinationals, Toyota and Sony, are among
the top 10 corporations.
The Japanese economy has succeeded in making many adjustments over the years,
when the sense of crisis was sufficient.
The Nobel laureate Robert Mundell told an audience at City University last
week that the 12 per cent per annum growth rate achieved by Japan between 1955
and 1970 was 'probably the most successful economic expansion of any economy
at any time in history'.*
Although the envy of the world by the Eighties, Japan, with its heavy
dependence on imports of oil and raw materials, had felt vulnerable in the
face of the 'oil shocks' of the Seventies. Its modern consumer society, with
one of the highest standards of living in the world and huge savings on top,
is in part a reaction to those crises. And the Japanese were particularly
stung by an EU Commissioner's remark in the late Seventies that they were 'a
nation of workaholics living in rabbit hutches'.
Mundell thinks that, encouraged by America, Japan has relied too much on
fiscal policy and not enough on monetary policy to refuel its economy. It has
also been good at macro-economic policy mistakes: in 1997, for example, it
raised consumer taxes just when it seemed to be emerging from the recession
that followed the bursting of the bubble.
With almost incredible ineptitude, the Bank of Japan tightened monetary policy
last August when the economy was again showing tangible signs of recovery.
To any visitor to Japan, the current period of deflation seems very much a
'golden recession'. Moscow was never like this. And, even if the political
system seems paralysed, there is far more awareness in Tokyo now of the need
for the next step in Japan's 'catch-up' process with the West.
This is far from saying that simultaneous economic slowdowns in the US and
Japan are not worrying. They are, and it is going to be a very difficult year.
Japan is aware of the need to catch up with some of the 'reforms' now
commonplace in the West, and it needs to address its banking crisis the way
the US came to grips with the potentially disastrous Savings & Loans crisis.
History suggests it might be capable of the adjustment. But it will be a very
hard road.
*'The Thornton Effect: Monetary Instability Arising from Big Wars', City
University
Sell, sell, sell. A week of market madness
Line of failures feared as telecoms boom hits gloom
Charging bulls and bears with sore heads
'Stockbrokers ran stalls on Petticoat Lane to make money'
Guardian Unlimited ) Guardian Newspapers Limited 2001
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