Japan must introduce deep structural reform if it is to cure its economic ills, writes John Edwards Published: FT March 18 2001 20:43GMT | Last Updated: March 18 2001 20:50GMT In dealing rooms around the Asia-Pacific region in recent weeks we have listened with weary familiarity to the daily toll of Japan's woes: falling industrial production and machinery orders, tumbling equity prices, continuing price deflation, a weakening yen, the imminent return to a zero interest rate and a prime minister eager to abandon a job no one else wants before the expected debacle of the upper house elections. Weary familiarity, because it is after all the 10th year of disappointed hopes, a period in which Japan's economy has grown on average at only a quarter of the rate attained by the United States - or Japan itself in the decade before. Economists said at the beginning of the 1990s that Japan's central problem was the unwillingness of its banks to recognise losses on assets deflated by the collapse of the speculative boom of the late 1980s. A decade later, and with due recognition of useful progress over the past two years, they are still saying exactly the same. If Japan's distress has been so prolonged and so consistent, why should the rest of the world be particularly troubled by it now? The new element is not Japan's economic problems but the context in which they have recurred. Japan's backwards lurch could not have come at a worse time for the country, its regional neighbours, the US, or the rest of the world. In the US recession a decade ago, Japan's economy was slowing but growth remained positive. Even during the US slowdown in the mid-1990s, Japan was coincidentally, but helpfully, experiencing a short-lived acceleration of growth. Since the second quarter of 1991, when Japan began its long stagnation and the US its long expansion, the two economies have moved in offsetting ways. Now the world's biggest and second biggest national economies are going down together. This coincidence is bad for Japan's regional neighbours. For most of them, the US is the single biggest export market and, for many, Japan is the second biggest. Asian growth is sliding after an unsustainably rapid rebound from recession - HSBC forecasts growth this year in east Asia (excluding China) and Australia at around half the rates of last year. A sustained downturn in the two biggest markets for the region does not help. Japan's new slide also comes at an awkward time for the country's global and regional political standing. Ten years ago the Tiananmen Square crack-down was still a recent memory and China's vast shift to a market economy had yet to prove its durability. However, over the past decade China's economic success has buttressed its claim to an important role in world affairs, while Japanhas been steadily undermined by its persistent economic frailty. In a year in which Japan seems leaderless, China is poised to achieve its long-held ambition of joining the World Trade Organisation. Japan's setback raises difficult issues for Washington. The Bush administration sees the world much more in security terms than its predecessor did. Raising the priority of the US relationship with Japan is one of the central foreign policy objectives of the new administration, which is concerned about China's growing dominance. Yet at the very time the administration is looking to draw Japan into a closer security and economic alliance, its political leadership is paralysed by the trauma of its failing economy. Japan has marked time while the global economy advanced. The global econ omy integrated more rapidly in the 1990s than in the 1980s. Ten years ago the Berlin wall had only just fallen and the great new wave of globalisation which followed had only just begun. While Japan has been preoccupied by its own economic problems, the world has seen greater global capital flows, more economies joining the global market economy, bigger global financial markets, proliferating new technologies and the new impetus to the expansion of world trade created by the Uruguay round settlement, the North American Free Trade Agreement and Europe's common currency. Japan's relative decline accounts for much of the gulf between its claims to regional leadership and its want of followers. Concerned by Japan's isolation from the economic alliances of Europe and North America, the Ministry of Finance and some officials within the Bank of Japan are pressing for east Asian agreement to a system of regional exchange rates based on a currency basket prominently including the yen. At the same time Japan is exploring bilateral trading pacts within the region that could later form the basis of a regional trading agreement. Unless Japan can manage its own economy, neither proposal can make much progress. A decade ago Japanese officials plausibly saw regional economies as a flock of flying geese, with Japan the leading bird. No regional economy now wants to fly in Japan's direction. With Japan likely to slip back into barely discernible growth this year and very little the next, most of the palatable options to improve the situation have already been exhausted. The solutions that do not require a reconfiguration of political power within Japan have now been tried and tried again - and they have failed. The government has spent money with such persistence that Japan's government debt is higher in comparison with GDP than for any other Group of Seven industrialised country. Monetary policy is once again nudging at the barrier of zero interest rates. Over the past three years, the bailout of bank bad debt has been approved, funded and in no small measure accomplished, again with far less result than hoped. The massive cross-shareholdings that sustain Japan's corporate power grid are a more intractable problem and one that is only now being engaged. Yet if there is anything to be hopeful about as Japan begins the 11th year of its malaise, it is precisely this exhaustion of options. The terminal unpopularity of Prime Minister Mori, the difficulty the LDP finds in replacing him and, most importantly, the massive losses now to be written off as cross-shareholdings are marked to market, may all be signs of a recognition that deeper change is now unavoidable. John Edwards is HSBC's chief economist for Australia and New Zealand. _______________________________________________ CrashList website: http://website.lineone.net/~resource_base
