Japan may still face some serious economic problems in the months and years to come, but the way the government and the financial authorities have handled the economy in the last 12 months mean there is today a great deal more hope for a sustainable recovery, according to five British financial journalists attending a recent symposium in Tokyo.
The journalists were in broad agreement that Japan’s economy is in not nearly as bad a condition as they had expected to find before leaving London, and that the government and financial authorities have learned from earlier errors. The key now, they said, will be to continue to implement reforms in such a way that the upturn is not damaged and to avoid the “shock therapy” approach to fixing the problem.
The five were invited to Japan by the Keizai Koho Center and spent nearly a week meeting with representatives of the government, business leaders and decision-makers in the financial world before the symposium, titled “Changes in Japan: Is Japan getting on a new track of growth?” on Dec. 5.
The first to address the gathering was Larry Elliott, the economics editor of The Guardian, who expressed surprise at the difference in how he expected Japan’s economy to look before he arrived, and the reality once he was in Tokyo.
“The image we have of Japan in the U.K. is one of crisis, but from walking around Tokyo it doesn’t seem like that at all,” he said.
He disagreed with one suggestion that was put to him during the trip that Japan really needs a major economic crisis to push through meaningful and effective change, and that Prime Minister Junichiro Koizumi is Japan’s equivalent of former Soviet Union leader Mikhail Gorbachev, who dragged Moscow into the modern world.
“That’s probably exaggerated,” Elliott said. “And if Japan did have that sort of crisis, it would be very serious. It would lead to a 1930s style depression with the effects being felt far beyond Japan.” The reasons for his optimism that Japan has put the darkest days behind it are six-fold, he said.
First, that the economic data does seem to be gradually improving. “Business confidence is better, investment is up, industrial production is up and exports are strong, although I would also like to see nominal GDP rising,” he said.
Equally important has been the implementation of macro-economic policies geared toward expansion and growth, the Bank of Japan’s continuing zero interest rate policy, fiscal stabilizers that have been effective and intervention to hold down the yen.
“Lessons have been learned from previous cyclical recoveries,” Elliott said, pointing out that inappropriate moves — including tax hikes — effectively killed earlier recoveries in their tracks.
The third element was the zero interest rate policy helping sort out the problems of the banking system, he said, emphasizing the relative health today of the Big Four major banking groups. In rural areas banks are still in trouble, but the government handled the recent collapse of Ashikaga Bank very well, he added.
He went on to say that he “wasn’t disheartened by the glacial pace of reform,” putting the slow pace of change down to cultural differences between Japan and Britain. Koizumi’s efforts, he said, have at least raised expectations of change.
Elliott’s fifth point was that the external outlook over the last year has been “very promising,” with 8 percent growth in the United States economy and strong growth continuing in China and East Asia as a whole. He cautioned, however, that China might be experiencing something of a bubble of its own, although the problems will be of a far more temporary nature than those Japan has been facing for the last decade.
Finally, he touched on the fact that the British economy is reliant on its strong financial services sector, while Japan “has a strong and competitive industrial base that means the country has a bright future.”
“I’m probably more optimistic about the Japanese economy than when I came here,” Elliott concluded, adding that in the absence of a major crisis, such as a banking crisis, Japan’s GDP can be expected to grow as much as 2.5 percent “if the reforms take hold.”
Rosemary Righter, associate editor of The Times, identified a political cycle of crisis, response, improvement and complacency. Japan has clearly suffered the first part of the cycle, has half dealt with a response and making an improvement — but the question of whether it can progress depends on the fourth element, she said. Complacency.
“Thirty months ago, Japan was more ready for change than it is today,” she said. “Bad debts were bubbling and people were insisting that Japan couldn’t go on doing the same things. It needed to reinvent itself to avoid a national decline.”
But today, while there is still an understanding of the need for change, Righter is “not entirely encouraged now” that there is the same desire.
She pointed to very low direct foreign investment, due to regulatory “hurdles,” a continuing problem of unwarranted deference within big companies and a painful lack of women in top corporate positions.
“There has to be a change in the mind-set as that’s what is causing problems,” she said, adding that there is still anger at pork-barrel politics because little has changed.
“So is Japan robust enough to return to normal?” Righter asked. “While experts here are confident of moderate growth that is more sustainable than the last three cycles, there is still the belief that chucking money at the problems works.
“The sense of crisis has receded,” she concluded. “And with it has gone the sense of a need for meaningful reforms.”
John Plender, the senior editorial writer of The Financial Times, was more optimistic and likened the cyclical upturn to the a stock market recovery driven by foreign buyers, making it a “gaijin recovery.”
“The thing that has impressed me most in the two years since I was last here was the extent to which the corporate sector has addressed its problems,” he said, although while the big firms have been able to cut their debts, reduce manning levels and become more profit-conscious, it is the small and medium-size firms that are suffering.
Two years ago, he said, he wrote of the “extreme naivete” of Japan’s electorate in believing that Koizumi would be able to deliver on the reforms he had promised. “But, in fairness, he has done better than I thought he would,” Plender said.
The key, he said, is for Japan to lock in the economic recovery, and to do that Koizumi, the Finance Ministry and the Bank of Japan cannot afford to make any policy mistakes. Plender said all five of the participants had been “reassured” in talks with the BOJ that indicated that “there won’t be any premature tightening of either fiscal or monetary policy.” That, in turn, will allow the private sector to “get on and perpetuate the recovery,” he added.
He added that there is also a need for Japan to “get lucky,” such as by avoiding a crisis of China over-heating; while the public also needs to be encouraged to join “the stock market party.”
“It would be psychologically important for the corporate sector for the public to come back into the stock market,” he said. “But corporations don’t encourage that because dividend payments are low and the corporate sector is not pressuring firms to raise them.
Plender also raised the question of corporate governance in Japan, saying the nation is suffering a “vacuum” of corporate governance that no one is stepping forward to fill. The logical candidates, such as pension funds and insurance companies, have not been encouraged to do so in the past, he said.
“I think somebody is going to have to step forward and make that decision as it would be very much in the interests of the corporate sector to get households into the stock market,” he said. “I would urge Mr. Koizumi to call on companies to rethink their dividend policies and pay more wherever it is prudent to do so.”
“I’m rather more optimistic than I was back in 2001,” he ended, “and although since the Meiji Restoration Japan has traditionally only changed direction as a result of a major shock, I’m not sure that’s the way it works now. Japan doesn’t need a monumental shock, and indeed it could be very damaging in a deflationary spiral.”
For Jeremy Warner, the trick for Japan is to not “throw out the baby with the bath water.” Warner, the business editor of The Independent, said, “Japan still has a great deal to be proud of in the way it has tackled reforms and it must not change so that it damages its successes and social cohesion. It doesn’t need a revolution.”
And while the stereotypical image of Japan is one of economic malaise, deflation, a bankrupt banking sector, slow reform, over-staffing and “funny-money” construction projects, “I have the impression of a great deal of change and progress being made,” he said.
“Everywhere I go in Tokyo there is evidence of new development — and that is not an attribute of an economy on a precipice. This is a prosperous and vibrant metropolis,” he said. “Sure, there are some very depressed regions of Japan, but a capital tends to be a bellwether of the rest of the nation and my impression is that Japan is moving very much in the right direction.”
But while the authorities’ macro-economic policies have been “hard to fault,” he said, there has been a delay in the buying of government bonds finding its way back into the system as new lending by banks. Warner called for structural reforms to be pushed through faster, although to over-do it and cause radical changes when the economy is weak could cause a lot of short-term pain and become “political suicide.”
“Japan must stop beating itself up about what is going wrong in the economy as it’s getting a lot right,” he said. “It must evolve to survive but it must also hang on to its culture and traditions because without that you are nothing.”
The final member of the panel was Anatole Kaletsky, the economic commentator and associate editor of The Times, who has been a regular visitor to Japan in the last 10 years — but this year proclaimed himself “much more confident and optimistic.”
There are three potential scenarios to look at Japan’s situation at present, he suggested; the first is that there has not really been an improvement and that Japan needs a crisis to turn itself around; the optimistic view is that Japan has turned the corner and is picking up because of a global recovery and that in the future there will be a shift away from the American consumer to the Asian consumer that will help the Japanese economy.
The third possibility is somewhere in the middle, he said. “Over the last 10 years, Japan has suffered one of the most serious crisis of any developed economy,” he said.
The problem was the result of long-term structural change with the end of the post-war “catching-up” era in the mid-1980s, the financial bubble and the crisis when it burst; and poor policy making when the crisis struck, which manifested itself in the BOJ not knowing what to do, a fiscal policy crisis when the Ministry of Finance “reacted unwisely” and raised taxes in the mid-1990s and corruption in public spending.
The good news, he said, is that some of these problems have been remedied. Policymakers in the BOJ, the Finance Ministry and factions within the ruling Liberal Democratic Party are “rowing in the same direction” and fiscal policies are stimulative and expansionary, Kaletsky said.
“The combination of this improvement in macro-economic policy means that it has stopped getting worse and the global recovery has helped float Japan off the shoals and dammed the financial crisis, allowing the banks to repair their balance sheets,” he said.
The economy will still face a range of problems — including inefficiencies in the over-regulated service sector, pressure from demography and from China — for the next 10 years or so, he said. But, he added, the economy is rebounding.
He suggested that changes are “more likely to come in a period of prosperity and economic growth rather than crisis,” and predicted that, “Japan, in the next few years, will probably be in a better position to make the reforms that everybody pretty much agrees now are necessary to respond to the challenges, and seize some of the opportunities of this new economic structure that will be evolving over the next decade.”
And now that Japan is moving into that situation, it is a good opportunity for Japan “to remain one of the strongest economies in the world.”
“And if not, then it doesn’t deserve to keep its wealth and the prosperity it has built up,” he said.
In response to a question about the kind of reforms that are necessary from moderator Naoaki Okabe, chief editorial page writer of the Nihon Keizai Shimbun, Plender agreed that changes are required to the postal and highway systems, but the problem is the implementation of the changes.
Kaletsky fielded another query from the floor concerning inflation-targeting, saying that during talks with BOJ officials, it was clear that the bank has decided to not set a target while the economy is still feeling the effects of deflation but will consider target-setting when inflation returns, a decision that he approved of.