Newsweek Japan – June 4th 2011
Disaster reveals national character in the starkest possible way. Japan’s response to the unprecedented triple blow of earthquake, tsunami and nuclear meltdown has demonstrated both its strengths and weaknesses – to the world and perhaps to the Japanese themselves.
On one side of the balance sheet are the courage, determination and discipline of ordinary citizens.
On the other side are incestuous ties between bureaucrats and big business, a lack of strategic thinking and a frightening vacuum of political leadership. These are the flaws that have led to Japan’s long slide from feared and admired economic superpower to poster child for policy failure.
The key question now is which side of Japan will emerge in the aftermath of these terrible events.
Japan’s most serious problems today are political, not economic; and not inevitable, but man-made. The first of Japan’s two lost decades was in a sense excusable. The collapse of one of the biggest bubbles in history was bound to lead to financial crisis and a painful work-out of the accumulated excesses. But the second of the lost decades cannot be blamed on the bubble, now in the distant past.. It was the result of choices made by individuals and institutions.
In most cases, they were choices to do nothing – to prefer the comforts of the status quo to the risks of the new and uncertain. In fact, though, it is the continuation of the status quo that carries higher risks. The reasons is that it will lead to decline, and that is never a comfortable process. It means instability, weakness and,, ultimately, submission to the will of others.
The most important economic choice has been taken by Japan’s central bank. By refusing to adopt the quantitative easing or inflation targets now standard in all other major countries, the BoJ has ensured that Japan will have the world’s most deflationary economy. An inevitable side-effect has been that the yen has risen sharply and Japanese companies have lost competitiveness against the US, China and Korea. The auto industry is the last sector of Japanese global dominance, but now even the mighty Toyota is reconsidering its commitment to manufacturing within Japan. Meanwhile Hyundai and Volkswagen are churning out record profits, and even GM is making a comeback.
Trying to imagine Japan without a world-beating auto industry is almost impossible, like imagining Switzerland without the Alps. But change happens fast in today’s world. Twenty years ago nobody would have imagined that the market for hot new consumer electronic products would be dominated not by Japanese companies, but by Apple, Samsung and Nokia.. Another twenty years of BoJ inertia, and there’s no saying what will be left.
The second important choice has been the emphasis on fiscal austerity. The DPJ won its landslide election victory on a pro-growth, pro-household manifesto. Its only strong idea was a big increase in child allowances – which would combine Keynsian stimulus with French-style incentives to fertility that might have some effect on Japan’s demographic shrinkage. What happened next was a volte face that was stunning even by the standards of Japanese politics. Within a year the new administration was uttering blood-curdling warnings about fiscal apocalypse and promising large hikes in the consumption tax.
If anything requires a massive easing of fiscal policy , it was the disaster of March 11th. Not only is there the immediate need to pour resources into the affected areas in order to restore the living conditions of the many thousands of victims. Vast amounts of money will be also needed to resettle communities in new location and to improve coastal defenses all down the pacific coast. Incredibly, though, even after the earthquake the talk was still of budget constraints and the impossibility of issuing new bonds,.. The Japanese public wants to do all it can to help the people of Tohoku. The government seems determined to exploit this spirit of self-sacrifice as an opportunity to push through its agenda of fiscal reconstruction. Whatever the question may be, the answer is always the same – a hike in the consumption tax.
In other areas too the safety of the status quo is illusory. While China and other rising powers have been using sovereign wealth funds as instruments of national policy, Japan continues to keep its foreign reserves in short term US debt, which has one of the worst risk / reward ratios imaginable – very low yields in a currency that has been falling for decades. The idea of a Japanese SWF was dismissed on the basis that it “might lose money.” Likewise, there has been much talk of turning Tokyo into a global financial center, but without radical reform in taxes and regulation, that will remain a bureaucrats’ midsummer night dream. The reality is a continuous outflow of human and financial capital to Hong Kong and Singapore. Long before the Fukushima disaster , the black ships were disappearing over the horizon.
In the long-term, Japan is going to have to rethink its entire energy strategy. It will need to scrap or relocate power plants and make sure the system has ample spare capacity and can move electricity around a single grid. The relationship between regulated and regulated, the pricing of electricity , legal liabilities and responsibilities – all need to be reformed in line with best global practice.
The disasters of March 2011 were a “black swan” – a low probability, but devastating event.
To manage the risk of even more destructive “black swan”, Japan to reverse the concentration of functions in Tokyo and build up regional cities as administrative and commercial hubs would . Decentralization has been talked about for years, but it only stands a chance of success if full tax competition is allowed. Imagine a financial center in Kyushu or Okinawa with top-quality transportation and infrastructure and a special low tax regime to attract top-class companies and individuals from Asia and the rest of the world. The black ships would turn around again for sure.
Japan has the resources to do it all. Far from being “the next Greece” as the fiscal hawks maintain Japan is still the world’s largest creditor nation. Rather than damaging economic growth by tax hikes, policy makers should be taking advantage of the lowest yields in world history and issuing “Reconstruction Bonds” at the longest possible maturities. They should copy Mexico, which issued 100 year bonds last year, or better still Britain, which financed its war against Napoleon with perpetual bonds* which are still in existence now. Impossible? Not at all. Every year Japan’s private sector piles up a savings surplus large enough to cover not only Japan’s government deficit , but a substantial part of the US government deficit too.
There is no shortage of ideas about how to revive Japan. Many of them have been debated for ten years or more. The problem has been too much debate and too little action. The responsibility for the lack of leadership and other political flaws ultimately lies with the public itself, which has remained apathetic and largely content with the status quo. Usually people get the leaders they deserve.
Ganbare Tohoku, Love for Japan, the save energy boom and other manifestations of social solidarity are impressive to see. But they shouldn’t obscure the questions that have to be asked and the choices that need to be made. Japan has plenty of harmony now, perhaps too much. As the nuclear crisis drags on and information becomes sparser, it could do with a little more friction and a lot more imagination.
Compared to the bumptious boss of the deadly yakiniku chain, all those involved in the Fukushima disaster are well versed in the rules of of etiquette.. Even so, the media should look beyond the theatre of apology and lay bare the decision-making process of the respectable elite that led to the still potentially disastrous nuclear contamination