The trouble with Japan is that it is run by the Japanese. Their consensus-seeking culture seems capable of great changes only after calamity shows that change is inevitable. Japanese history is littered with countless examples of this. In 1853, the arrival of American warships in Tokyo Bay convinced the Japanese that they must end centuries of self-imposed isolation or face subjugation by the more advanced and militarized West. In 1945, two atomic bombs made it clear that the war was lost and resistance would be futile. It would be a tragedy now if only another calamity persuaded the Japanese that their formula for economic growth–exports and more exports–can no longer work.
“Tragedy” is an ominous word; but here, it is not overwrought. Japan’s economy is verging on a deep decline or even a collapse. For the first quarter of 1998, economic output (gross domestic product) declined at an annual rate of 5.3 percent. Unemployment now stands at 4.1 percent, the highest rate since statistics were first kept in 1953. Japan is Asia’s most important economy, and if it falls into a severe recession, economic prospects for the region and the world will darken perceptibly.
Conventional wisdom holds that weak banks have crippled Japan. This is partially true. The banks have an estimated $500 billion to $600 billion in bad loans left over from the “bubble economy” of the late 1980s, when rampant real estate speculation drove land prices to absurd levels. But feeble banks are as much a symptom as a cause of Japan’s plight. The main affliction is the addiction–psychologic and economic–to export-led growth.
For decades, exports and the related business investment powered the economy. There was an unwritten social compact. Expanding sales would protect jobs in export industries; other jobs would be protected by shielding the rest of the economy from full competition. Social harmony would reign. Predictably, many Japanese welcome the yen’s depreciation (making exports less costly) as the path to recovery.
It isn’t. Any temporary rise in exports will largely come at the expense of Japan’s neighbors–Korea, Indonesia, Thailand and even China. But these countries are also markets for Japan’s exports. The worse their economies do, the less they will ultimately buy. Moreover, higher exports won’t (as in the past) lead to an investment boom. Japan is awash in surplus capacity in export industries from cars to computer chips.
Japan’s main problem now is a loss of confidence. No one has faith that the economy will soon revive or that the government has a coherent plan to revive it. The best way to restore confidence is to take steps that surprise everyone–that go beyond what’s expected from Japan and, in the process, repudiate export-led growth. A good first step would be to repeal last year’s increase of the national sales tax (from 3 percent to 5 percent). Making consumer goods cheaper is the best way to spur consumer spending; doing the opposite last year torpedoed Japan’s fragile recovery.
It would also be helpful for Japan to prod its banks to grant debt relief–that is, to write down loans–to Asia’s other ailing economies. While worsening Japan’s banking problem, this would improve the region’s economic outlook. Debt relief would enable other economies to recover more rapidly by lightening their need to earn scarce foreign exchange (dollars, yen) to repay overseas loans. Once Japan acts, U.S. and European bank regulators should push their banks to do the same.
Finally, Japan needs to make domestic spending–not exports–the economy’s permanent driving force. The obvious way to do this is to reform the housing market. Most Japanese still live in homes and apartments that are unnecessarily cramped. But a maze of zoning, environmental and tax regulations hampers new building. In Tokyo, the average building is still about three floors. Liberalizing regulation in many other areas (communications, distribution, transportation) would also raise spending. New investments won’t occur spontaneously. There must be opportunities to invest profitably and these are frustrated mainly by laws and regulations–not weak banks.
Will Japan adopt such a program? Probably not. Consensus thinking is reinforced by webs of self-interest between government bureaucrats and protected private constituencies. Although the Japanese talk “deregulation,” change has been slow.
None of this matters much when things are going well. Indeed, it can help a country pursue a desirable goal. But it is a huge disadvantage when change becomes imperative and the consensus is blind. Japan has been this way since the mid-1980s, when export-led growth first weakened. The things that Japan ought to be doing now are really the things that it ought to have done then. If it had, it might well be today what almost everyone thought it was: an economic powerhouse that would overtake the United States.
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