The Japanese have an almost infinite capacity for denial. For most of the 1990s, they have reassured themselves that their economy was fundamentally sound. Despite feeble growth (barely more than 1 percent a year since 1992, a quarter of the level of the 1980s), unemployment stayed low because companies were loath to fire longtime workers. Inflation was virtually nonexistent, and living standards remained high, even if they didn’t increase much. So the Japanese delayed dealing with their basic problems: a weak banking system and an economy incapable of generating a consumer-led expansion. They are now reaping the whirlwind.
There’s a real possibility of recession–an outright drop in production. This would hurt Japan and, more importantly, the global economy. Even the Japanese now sound frightened. “A worldwide depression originating in Japan must not be triggered,” Prime Minister Ryutaro Hashimoto said recently when announcing a 2 trillion yen ($15.4 billion at 130 yen to the dollar) tax cut to revive the economy. Critics wonder whether this and a program to bolster banks are enough to avoid a recession. But Hashimoto is correct that a slump would endanger more than Japan.
All of Asia’s economic casualties–Korea, Thailand, Indonesia, Malaysia and the Philippines–need to export their way to recovery. They have depleted their foreign exchange reserves (dollars, yen, marks) and have accumulated huge overseas debts. To buy imports and service their debts–in other words, to keep their economies running–they need to earn more foreign exchange. A healthy Japan would help by providing an expanding market for their exports. That won’t happen. Even optimistic economic forecasts see meager growth for Japan in 1998. The International Monetary Fund, for example, recently predicted only 1 percent.
Worse, Japan’s huge current account surplus (a broader version of the trade surplus) might increase slightly. The IMF estimates a rise from $95 billion in 1997 to $99 billion in 1998. At best, then, Japan won’t buy many extra exports from the rest of Asia. The United States and Europe will have to absorb most of the increase. A Japanese recession would make everything worse. Japan would buy less from Asia and try to sell more itself. All countries would have a harder time reviving.
This defines the economic menace posed by Japan. Asia’s economic downturn might feed on itself: too many sellers chasing too few buyers. Typically, such production surpluses resolve themselves in two ways. High supply depresses prices, which expands demand; and lower prices cause some producers to become unprofitable and go bankrupt, which reduces supply. A new equilibrium materializes. For Asia’s ailing economies, higher demand is better than lower supply. The more bankruptcies, the greater will be the human hardship and political costs.
Self-deception ultimately explains Japan’s plight. The Japanese have never accepted that change is in their interest–and not merely a response to U.S. criticism. “There was a defined economic system well-greased to catching up with the West,” says economist Edward Lincoln of the Brookings Institution. It favored saving over consumption and bureaucratic power over the market. The idea was to nourish efficient export industries with ample investment. At home, government would protect groups (high-cost farmers, small shopkeepers, business cartels) that anchored the Japanese way of life, even though they kept consumer prices high. Social stability and economic growth seemed compatible.
But by the mid-1980s, this system was disintegrating. Japan has absorbed most known technologies. More importantly, exports could no longer drive expansion. The world could not absorb ever-growing trade surpluses. They led to trade barriers or a higher yen. Japan never adjusted to this shift. Anti-competitive practices that deterred consumer spending were only slowly dismantled. In the United States, consumption spending is 68 percent of gross domestic product (output); in Japan, it is 60 percent. So the economy stagnated, and that is now fraying Japan’s vaunted social protections. Companies fail, because weak banks no longer support them. Lifetime employment erodes.
The Japanese have avoided their new reality. Until recently, they encouraged a lower yen in the hope that lower-priced exports would ignite a trade boom. This was the familiar formula for growth; it was also an illusion. Exports benefited, but the effect was offset by other weaknesses and some policy blunders. In April, the government raised the national sales tax from 3 to 5 percent, which devastated consumer and housing spending. Japanese leaders brushed aside warnings that the tax increase was ill-timed. But why was a country that already underconsumes adding a new tax on consumption? Good question. Little wonder that Japan is part of the Asian problem–and not the solution.