Asian Ally: Japan

GWEN IFILL:

We get more on Japan's economic and political outlook from Mike Mochizuki, director of the Sigur Center for Asian Studies at the George Washington University; and Ayako Doi, editor of the Japan Digest, a daily publication covering political and economic developments in Japan.

Professor Mochizuki, ten years ago, this president's father went to Japan. At the time the United States was struggling; Japan was prospering. Now ten years later it's almost entirely the opposite result. Why is Japan struggling?

MIKE MOCHIZUKI:

Well, it's been undergoing an economic stagnation for the last ten years. It's still trying to deal with the bursting of the bubble economy, which left in its wake trillions of yen of bad debt. And because of that, even though the Japanese have tried all sorts of measures — fiscal stimulus packages, loose monetary policies– because of the problems in the banking sector and specifically the bad loan problem the Japanese economy just has not been able to get back on a growth track.

GWEN IFILL:

Ms. Doi, can you explain to us what we mean when we're talking about the bad loan problem. We're talking about four recessions in Japan in the last 10 or 11 years.

AYAKO DOI:

Well, you know, since the bubble burst in 1990, late 1990, I think what it was, was that the government and the Japanese economy as a whole didn't come to grips with the bad loan… the size of the bad loan problem early enough. So although….

GWEN IFILL:

Bad loans to businesses, corporations?

AYAKO DOI:

Right, right. The various measures were taken, as Professor Mochizuki said. They were in hindsight, they were all too small too late kind of thing. They never sort of had a desired effect of turning around the economy and in the meanwhile the banks kept holding those bad loans because not getting rid of them would mean bankrupt companies. The companies that they lend money to — and so the problems were sort of put off all these ten years and kept on getting worse.

GWEN IFILL:

Now the president has said not directly today to the Prime Minister Koizumi, he did not say that this was something that Japan should fix, but he and his Treasury Secretary Paul O'Neill had been hinting this is something they should do. What did you think of the president's comments today that Koizumi is a great reformer?

AYAKO DOI:

Well, he presents himself as a reformer, and I think he is more committed to reform than most other politicians. And so it's sort of like he's the only hope for Japan and the rest of the world. So, President Bush had not much choice than to support his reform program and hope that things will get better or that he will act on what needs to be done.

GWEN IFILL:

Is that the way you saw it too, Professor?

MIKE MOCHIZUKI:

Yes, but I think that President Bush in terms of the public arena has to really show his support for Mr. Koizumi as Ms. Doi indicated there's really no alternative. But I think privately he was probably quite forceful in saying that something really needs to be done quickly or Japan might enter a major financial crisis, which could pull down not only the Japanese economy but the U.S. economy and the rest of the world economy.

And although Mr. Koizumi has been talking about structural reform, that means a lot of things from deregulation to dealing with the burgeoning public debt to the privatization of public corporations. But the problem is, is that he really does need to set priorities, although he says he wants to do everything. All of these things are politically difficult. And I think the number one priority ought to be restoring some health in the banking sector.

GWEN IFILL:

Is the president also trying to come up with some sort of political… maintain political support from Japan for the U.S.-led war?

MIKE MOCHIZUKI:

Yes he is. And that's why one of the main purposes of this trip is to show how important Japan is as an ally to the United States and to thank Mr. Koizumi and the Japanese people for all the effort in the anti-terrorist campaign. And the other thing is that President Bush is interested in the revival of the Japanese economy not just because it makes good economic sense but because it makes good geopolitical and security sense.

He sees a weak — economically weak Japan would not be able to contribute as much to the anti-terrorist campaign, and he thinks a weak Japan economically would not be able to balance against the rise of the Chinese economy.

GWEN IFILL:

Ms. Doi, the president in his much remarked upon axis of evil in his State of the Union speech rattled a lot of our allies around the world. What was the response in Japan?

AYAKO DOI:

Publicly the Japanese government and mainly Mr. Koizumi has fully supported his remarks. He said that he understands why he said that, and he agrees with him and so on. But then privately and in the press and so on, there's a lot of uneasiness about particularly the inclusion of North Korea as one of the nations in the axis of evil, because Japan, as well as South Korea and the U.S., had been trying to engage North Korea in some kind of a positive conversation for a decade or more now and it's been difficult.

Since President Bush came in office, he basically said that he's not going to continue the sort of sunshine policy of the Clinton administration, and that made things much more difficult for Japan as well as South Korea to have any kind of conversation with North Korea, and this remark may make it even more difficult.

GWEN IFILL:

Picking up on that same kind of nervousness, public response, private response?

MIKE MOCHIZUKI:

Yes, there is nervousness but what's very interesting is that Mr. Koizumi was, I think, quite forceful in saying that what's very important is that the United States work with Japan and South Korea in its policy towards North Korea and also on Iran.

I mean Iran was one of the three countries mentioned in the axis of evil. Japan has normal diplomatic relations with Iran. And I believe Bush officials essentially told the Japanese that they would like Japan's help in trying to use the diplomatic ties that Japan has to encourage Iran to not promote the spread of weapons of mass destruction.

GWEN IFILL:

Is the prime minister in any kind of political trouble especially in the wake of the firing of the foreign minister?

MIKE MOCHIZUKI:

Well, his public opinion polls have declined from an 80% unprecedented popularity rating to 50%, but I still think that he's not close to being kicked out of office. And I believe that the decline in his popularity might really energize him to take some decisive action on the economic problems at home.

GWEN IFILL:

And are there internal political forces in Japan which make it difficult for the prime minister to be the kind of reformer that the president says he is and that he is aspiring to be?

AYAKO DOI:

Oh, yes, certainly. I mean, the party that he comes from, Liberal Democratic Party, have held on to power because of this network of vested interests that they developed over many decades. And many of those people don't like what Mr. Koizumi is trying to do in terms of getting rid of the wasteful public sector economy and restructuring the banks.

There are… what Japan is faced with now in terms of banking sector reform is that… whether to write off this bad… force the banks to write off this enormous amount of bad loans and take the consequence of having hundreds and perhaps thousands of companies, big and small, go bankrupt with all the social consequences that go with it — or not do that and see the economy slowly go downhill like it has been in the last ten years. So it's a very difficult choice.

GWEN IFILL:

So what, Professor Mochizuki, should Japan be doing to turn itself around?

MIKE MOCHIZUKI:

I think immediately what the Koizumi government needs to do is to come clean about the bad loan problem and infuse….

GWEN IFILL:

Which has not happened yet.

MIKE MOCHIZUKI:

Which has not happened. And it's a moving target because as the economy falters the size of the bad loan problem increases, but what Mr. Koizumi has to do is to infuse public capital so that the banks can write off the loans. Let some of the banks even go bankrupt and some restructuring in the banking sector. Without that, any kind of loose monetary policy is just going to be ineffective.

GWEN IFILL:

Mike Mochizuki, Ayako Doi, thanks very much for joining us.