Newsweek Japan October 2007
The Abe Administration’s key achievement was to show that Japan hasn’t changed, and neither have its problems.
A recent newspaper article described how Japanese companies are re-employing workers on lower wages. Apparently fast-food restaurants have taken the lead, and one branch in Kyoto apparently has a worker who is eighty five years old.
The article was supposed to be a celebration of the new “flexibility” of Japan’s labour market, but this twenty first centiry version of “lifetime employment” made me think of the rapidity of Japan’s decline and the failure of government policy.
Is Japan about to slide into another “lost decade?” There are plenty of reasons to get worried..
The recovery is stuttering before ordinary workers have seen any improvement in their pay-packets. The BoJ has merrily hiked interest rates twice, even though consumer prices are still on the slide. In the stock market , bank shares have fallen like stones. Meanwhile the political world is beset by scandals and resignations, and risk-taking entrepreneurs are disgraced and abused in the media.
It wasn’t supposed to happen like this. Structural reform was supposed to have generated a “self-sustaining economic expansion.” Japan was supposed to have exited deflation. Banks were supposed to have created new business models that would match global standards of efficiency and profitability. Japanese politics, we were told, had been utterly transformed. The prime minister’s office now had god-like powers, and factional interests and bureaucratic obstruction were things of the past.
Ex-prime minister Koizumi offered up this intoxicating vision of change and renewal. Thanks to his political charisma, not just the public but the whole world was convinced that Japan’s problems had been miraculously solved. Like all great salesman, he understood instinctively what people wanted to believe. In Japan and overseas, opinion-leaders and intellectuals were quick to trumpet the sudden emergence of the “new Japan.” Rising suns appeared on magazine covers all over the world.
Mr. Abe was much more in tune with the reality of contemporary Japan than his predecessor. He looks uncomfortable and stressed-out, as indeed many Japanese people do as they struggle with the daily demands of work and household budgets. The Koizumi administration put on a kabuki-style performance, unreal but colourful and entertaining. In contrast, the Abe adminstration suffered the kind of bitter experiences that any salaryman would recognize – being forced to take responsibility for problems that were not your fault, the unreliability of colleagues you mistakenly trusted, the slow collapse of your dreams.
Political leaders, no matter how popular, have a limited ability to enforce change from the top down. Lasting success only comes when their policies reflect the deep-rooted concerns of ordinary people.. This was not the case with Mr. Koizumi. While his personal style was wildly popular, support for his pet themes of structural reform and postal privatization was tepid.
Mr. Abe’s key achievement was to remind us that Japan hasn’t changed and neither have the severe economic and political problems it faces. The idea that slogans and a cool haircut can change a nation’s destiny has been exposed as a childish fantasy. There are no rising suns on magazine covers any more. For this outbreak of realism, he deserves our thanks.
The key problem is to generate a genuine economic recovery, with rising wealth and income levels for ordinary households. This would have the strategic benefit of increasing Japan’s influence in the world and in Asia and helping to balance the rise of China. Chinese hard power and soft power go together. It is the value of the booming Chinese market to Western companies – in the financial, manufacturing, resources, and service industries – that give it the leverage to pursue its strategic interests. If Japanese consumption contines to stagnate, Chinese influence will continue to rise and Japan’s fate will be political isolation.
The first step to recovery must be to stop the anti-growth orientation of monetary and fiscal policy. The BoJ must be called to account for its mistaken interest rate hikes and given a clear inflation target as is the case in the UK and several other countries. Rather than warning darkly about “asset price bubbles”, the monetary authorities should consider a steady continuous rise in asset prices the sign of successful policy. Currently Japanese stock prices are no higher than they were 20 years ago and residential land prices are where they were 25 years ago. Anyone who call this situation a bubble should have their sanity questioned.
As for fiscal policy, consumption tax hikes must be completely off the menu. Japan is a country with a large enough savings surplus to fund not only its own government deficit, but a large proportion of the huge American deficit too. Record-breaking Japanese government debt is merely the other side of record-breaking Japanese financial assets held by Japanese corporations, banks and households.
The obsession with cutting public works budgets has gone too far. In many regional cities the infrastructure is old and crumbling and needs new investment. While corruption and influence-peddling should be deterred, Japan should not allow its infrastructure to fall behind the best standards in the rest of Asia.
Growth has also been damaged by heavy-handed and puritanical regulation. The assault on the consumer finance industry has cut off hundreds of thousands, perhaps millions of people from the supply of credit. The crackdown on “foreign criminals” (“furyo gaijin”?) has targetted many harmless people providing useful services as cooks and entertainers. The authorities should remember the old proverb – “if the water is too clean, no fish can live in it.”
Instead of fearing “abusive” foreign funds, Japan should be doing everything possible to make Tokyo the financial hub of Asia. If necessary, a special economic zone should be established, with tax, regulations, and immigration policies that are competitive with Singapore. If Japan doesn’t do it, other countries will – and reap the benefits in tax revenues, economic dynamism, and strategic influence.
What Japan needs most of all is a comprehensive growth strategy that bring together all these strands, and the solid and pragmatic leadership to bring it to fruition.
Unless there’s a complete change in priorities, some of you reading this article right now will find yourselves serving burgers and fries in your ninth decade of life. And probably your customers will include many Chinese tourists.