http://www.japanfocus.org/_Andrew_DeWit-Japan_on_the_Brink_of_Abyss___Updated_
Japan Focus
Japan on the Brink of the Abyss? [Updated]
Andrew DeWit
The economic outlook in Japan is very grim, as these brief overviews
(links below) 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. But instead, it may be in worse
shape than even the US (though clearly not Iceland and much of Eastern
Europe). Japanese financial institutions were not big players in the
CDOs, CDSs 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 labour 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 (cf. export-oriented businesses'
incentives to invest). 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 one to test out what it felt like to have a noose around
his neck.
The LDP and PM Aso Taro are of course 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 Koizumi Junichiro and Takenaka
Heizo "structural reforms," 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 in order 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
labour 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.
In the most recent edition of the Japanese weekly, ekonomisuto
(economist), Koizumi's neoliberal brain Takenaka Heizo still trumpets
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 JPY 35 trillion 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 the labour 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.
See Edward Hugh, Japan's Grim And Bear It 2009 Outlook, Japan Economy
Watch, January 26, 2009.
See Megan Ainscow, Retail Sales Set To Plummet As Economy Takes a Turn
for the Worst, CEP News.
See the commentary and update at Naked Capitalism on February 2, 2009.
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. Posted on January
29, 2009.
Recommended citation: Andrew DeWit, “Japan on the Brink of the Abyss?”
The Asia-Pacific Journal, Vol. 5-4-09, January 29, 2009.
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