Japan’s Ailing Economy
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RAY SUAREZ: For more, we’re joined by Richard Katz, senior editor at the Oriental Economist Report, a newsletter focusing on Japan. He is also author of Japan: The System that Soured. Nariman Behravesh is chief international economist for Standard & Poor’s, the analysis agency. And Yoshi Komori is editor at large at Sankei Shimbun, a daily national newspaper based in Tokyo.
Yoshi Komori, let’s begin with you. The Japanese prime minister comes to meet with President Bush with the Japanese analysts talking about a time in office we can count in hours rather than months. Why is the Japanese government so weak, so fragile these days?
YOSHI KOMORI: This is a result of some accumulated too passive an attitude, clinging onto the ancient regime, old paradigm, and so on. I think what is important about Mr. Mori’s visit, despite the fact that he is clearly a lame duck, I think he came here as an institutional representative of the Japanese government, as opposed to any sort of personal leader. I think the fact remains that the alliance between the two countries is very important. It is the Bush administration’s new policy to put more emphasis on the important of alliance. So I simply would not dismiss Mr. Mori’s visit to Washington.
RAY SUAREZ: Not to dismiss it at all, but just trying to under the current state of play in Japanese politics — what does it represent that after a recent turnover of prime minister, we’re already talking about another turnover, possibly?
YOSHI KOMORI: Mr. Mori probably represents all the problems and root causes of the current economic woes of Japan, which is characterized by the lack of a political determination and will to strike at the heart of those economic issues, which is causing the bad debts.
RAY SUAREZ: Richard Katz, we just got the political state of play. How about the economic one, what are the forces building up in the Japanese economy right now?
RICHARD KATZ: The problem we have is a structural problem in Japan that’s been going on for many, many years, and unfortunately the Japanese government has addressed that problem just by throwing money at the problem. The metaphor being used in Japan is, do you use stimulus of lower interest rates or fiscal rates as anesthesia to prepare to patient for the surgery of radical economic reform, or do you use it as morphine to dull the pain to avoid reform? And the liberal Democratic Party has done the latter. And that works throwing money at the problem works for a year or two to stimulate growth, but then the economy falls back down again. And that’s what we’ve seen, we’ve seen several episodes, and this the latest. So until they really bite the bullet of reform, we’re not going to have a solution. There are more and more people within the Japanese elite, in the Bank of Japan, and the economic industry who recognize this. But the Liberal Democratic Party itself is split between sections that would benefit from reform and sections that would be hurt by reform, and therefore they’re paralyzed and basically do nothing.
RAY SUAREZ: Nariman Behravesh, is there something quantitatively different about this cycle of decline? Japan has been in this situation for much of the last decade, but it seems like there’s almost a greater sense of urgency about it now.
NARIMAN BEHRAVESH: Well, I’m not sure I see that sense of urgency right now. The LDP is likely to trot out some more of the tried but not so true old ideas. So I’m not sure the urgency is there. Unfortunately, the crisis probably has to get a lot worse before they do anything radical.
RAY SUAREZ: What insulates Japan from having to act more quickly and more decisively to deal with some of these terrible developments?
NARIMAN BEHRAVESH: The irony is Japan is too rich, and this has allowed the government to throw a lot of money at the problem, as was said earlier. So until that wealth is squandered even further, and it seems unlikely that Japan is going to bite the bullet and take that bitter medicine.
RAY SUAREZ: Yoshi Komori, do you degree with that analysis?
YOSHI KOMORI: I tend to agree with that. I go back to Japan and Tokyo very often, and what I see there is still affluent and efficient and comfortable secure society where bullet trains and subway trains run exactly on time, nobody is really starving and people still go to see movies and fancy restaurants. So what we really need is acute sense of crisis, which is increasingly felt by elites or people who pay more attention to what lies underneath the surface. So I think we are really coming to the point, we’re coming to the moment of truth.
RAY SUAREZ: So the same difficulty that an outsider has in seeing Japan as economically troubled, the Japanese are having that same trouble too, they’re living off their savings and feel like they’re doing all right?
YOSHI KOMORI: That’s right. But if you look at the economic indicators of almost any source, beginning with the rising, I mean the employment, the unemployment rate, you get the sense immediately that the country is in a deep serious trouble. But again life goes on, and if you have travel to Tokyo, after visiting Tokyo for a few days; I don’t think you’ll get any sense that the country is in such a mired situation.
RAY SUAREZ: Richard Katz, today the prime minister met with President Bush and they exchanged polite talk about debt overhangs, about writing off bad loans for troubled banks. But if you had picked up the Economist Magazine or the business pages during the time of the last President Bush, they were talking about writing down bad loans and addressing some of these things then. How did ten years pass without any of this ever being addressed?
RICHARD KATZ: I think there are a couple of different factors. First of all, Japan is the only advanced industrial democracy where the same party has been running the show today as in the last 55 years, with the exception of about two years in Japan. It’s not true of any other country. And so monopoly is just as corrosive in politics as in economics and when you get one party running the place for decade after decade and you get rigidity, you get corruption, you get vested interest, you get inability to change. The other factor is, in contrast to say Korea, which is much more open to the world in trade and investment and the rest of Asia, countries that are much more exposed to international capital flows and trade tend to feel that pressure and have to reform.
So one of the very interesting things going on in Japan right now is that Japan is being flooded with cheaper imports of clothes and textiles from China and other places in Asia, and the result has been cheaper clothes for Japanese consumers who are flocking to buy these cheaper clothes, and that increases their real income they can spend on other items as well. The textile makers, some of them are saying let’s keep these imports out, let’s protect the inefficient producers at the expense of consumers. This is now becoming an open fight in Japan. And that’s the kind of fight they need to have in industry after industry, will they open up further, use globalization as an ally of reform, or will they continue to protect those inefficient industries? So I think the breathing space for what they’ve done for ten years, there’s less and less breathing space to just try to sweep the problems under the rug.
RAY SUAREZ: Nariman Behravesh, your colleagues have talked about rising unemployment, about troubled banks, about lowering prices. In the report we mentioned interest rates going to effectively zero. And I’m not even sure how that works. How do you have a zero interest rate on a loan?
NARIMAN BEHRAVESH: Well, basically they’re giving money away. The problem is, and they’re giving to it the banks. The problem is because the banks are in such a mess it’s unlikely that they’re going to pass that on. So it’s hard to see what a zero interest rate policy without the bank reforms does for the Japanese economy. That’s the fundamental problem here.
RAY SUAREZ: Doesn’t it make yen cheaper, thus making, I don’t know, a Sony television cheaper in the United States?
NARIMAN BEHRAVESH: Certainly the byproduct of a zero interest rate policy and more monetary stimulus could be a weaker yen, if those yen as it were went overseas. The real damage there would be to the rest of Asia, the Koreas and the Taiwans who compete with Japanese goods.
RAY SUAREZ: Do you think President Bush is a fan of a cheaper yen, Mr. Komori?
YOSHI KOMORI: I don’t think so given the current state of the economy of the United States. I think that’s one thing that if I were American I would probably very much fear. But the reality is that I think the trend is moving in that direction. Not just, aside from the policy of both governments, the Japanese individual Japanese savors, their inclinations to move their money out of Japan and put it somewhere else, most likely in New York. So that would certainly lower the value of Japanese yen.
RAY SUAREZ: Yen moving out toward the West, what about Japan recalling some of its overseas assets? Could Japanese troubles affect other parts of the world?
YOSHI KOMORI: Well, indirect investments such as securities and bonds, say in the United States, Japanese investors would like to see that stay there, because there they get much more dividends and interest than from anywhere else. But what I’m afraid is of seeing happen is that maybe some kind of contraction of Japanese direct investment in the form of plants, manufacturing bases in countries like Thailand or China, that might be affected by the economic, further economic downturn back home, and that would trance lit itself into a shrinking Japanese production in Asia.
RAY SUAREZ: Guests, thank you all.