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LONDON — Reports from Tokyo suggest that Japanese government and business leaders have not properly thought through economic policies designed to ensure recovery. Each problem seems to be treated in isolation, and decisions appear to be taken on the basis of what is most likely to satisfy the various pressure groups that fund the Liberal Democratic Party.

When Shinsei Bank (formerly the Long Term Credit Bank) was set up, it was permitted to return to the government loans that had lost over 20 percent of their value. When this provision was written into the terms of sale, the authorities seemed to think that the new management would be as amenable to persuasion as other Japanese banks. If only to demonstrate that they were a Japanese bank despite their foreign ownership, they would surely be willing to forgive the debts of companies with important links to the government. But when the Sogo Department Store group asked the banks to forgive a large amount of debt, Shinsei refused and made use of the provisions in their purchase agreement. At first, the government decided that Sogo should not be allowed to go bankrupt and was prepared to use taxpayers’ money to bail it out. The public outcry against such misuse of money forced a rethink.

Now it is hoped that a merger between Sogo and Seibu will save the bulk of the business. It is hard to see how this can be accomplished, given that Seibu also has huge debts. Why should it be easier for two companies with financial problems to recover than for each separately? The only way for both to recover is by massive restructuring that will entail closing many stores and cutting many jobs. Will they have the courage to pursue such a radical policy or will they try to postpone the inevitable?

The Sogo problem forced a rethink of the sale of Nippon Credit Bank. Many hoped that the same commitment that had been made to Shinsei would not be made to the Japanese purchasers of NCB; but, rather than see the NCB sale collapse or a sale made to another foreign group, the authorities not only have made a similar commitment to Softbank and their partners to take back loans, but have also agreed to sweeten the pill still further by an extra injection of capital (taxpayers’ funds). This decision was taken during the parliamentary recess. Was the timing chosen because an early decision was needed or because it was hoped that, in the heat of summer, neither the public nor the opposition would object?

Soon the authorities will face the problem of how to deal with two large construction companies that are probably at least technically bankrupt. Both Shinsei and NCB have reportedly extended large loans to both companies, and Shinsei has already said it will return the loans. Will the other Japanese banks be “persuaded” to forgive these companies their debts? If not, how can these companies of key importance to the LDP be prevented from failing?

It is hardly surprising that foreign observers doubt whether Japan has made adequate progress in clearing up its serious bad-debt and banking problems. The foreign view remains that while banking mergers are no doubt necessary, the main requirement is a major restructuring and shedding of surplus branches and staff. At the same time, there must be a much more stringent review of bad loans, perhaps leading to the bankrupting of some large and small companies. Very nasty medicine, but what is the long-term alternative if the economy is to achieve a real recovery.

Attention has also focused on the way the Fiscal Investment and Loan Program has used the money it has received from postal savings. The Financial Times reported Aug. 30 that “some foreign economists fear the FILP is sitting on hidden losses.” The authorities deny this, but “the agencies’ accounts have been opaque.” The decision that “semi-government agencies” hitherto funded by the FILP will be issuing bonds not guaranteed by the government is unlikely to dampen suspicions that FILP money has been used for projects that will never show an economic return. The lack of transparency in the FILP’s accounts is one reason why foreign credit agencies may consider downgrading Japanese public debt.

Foreigners have long considered Japan’s huge investments in public-works projects to be uneconomic and have doubted whether they will produce the sort of recovery the government aspires to. So it seemed significant when, on Aug. 28, members of the three coalition parties agreed that 24 construction projects out of 233 should be dropped (568.3 billion yen had been invested in the other projects and it was felt the money would be “wasted” if they were halted). The recommendation to stop some projects came apparently in response to public opinion — for example, in the case of a proposed dam on the Yoshino River in Tokushima Prefecture. The government may yet take a further small step toward halting the waste of taxpayer resources, but to many observers none of this seems adequate.

The disarray over the government’s financial policies is not the only economic problem facing Japan. The failures of the stringent food-industry regulations to prevent hygiene abuses and serious public-health hazards show that private industry is suffering from a breakdown in management systems to the point where it is affecting workers’ morale. The problems in the milk industry could be ascribed to a lack of competition and too cozy a relationship between managements and officials. They also reflect the fragmentation of an overprotected and unproductive industry.

Just as serious for Japan’s reputation have been the failures in quality control in industries exporting products and investing overseas. The discovery that Mitsubishi Motors had concealed complaints about its products has forced the resignation of the company president. The real worry in this case is about the attitudes of the various people who were involved in the coverup. Why was there no whistle blower? Unfortunately, a whistle blower in Japan would be regarded as disloyal by managements and fellow workers alike. Does Japan provide adequate protection and encouragement for whistle blowers? The answer must be “no.”

The costs to Bridgestone of the problems with unsafe tires sold by Firestone will be huge — especially in litigation-prone America. How did it happen that these products were put on the market without adequate safety tests? Did the fault lie entirely with the U.S. management? Was there here, too, a climate of secrecy and complacency that exacerbated the problem? Bridgestone will need to investigate thoroughly and overhaul its systems. It should also be ready to publicize its findings and take speedy steps to meet claims. Companies that make mistakes only make matters worse if they try to cover up or delay recalling products.

It is sad to see the Japanese “economic miracle” and the wonders of Japanese management exposed as myths. I was, to some extent at least, taken in by the mythology and still hope that I was not totally wrong. Radical and painful change is still possible. There are bright, dedicated people in Japan, but it is hard to find many examples among Japan’s elderly politicians. Too often, managers in industry and commerce seem to have become stuck in a groove where consensus rules and individuality is suppressed in “the interests of the company.” Whose company? The workers’, the managers’ or the shareholders’? In Japan, so far, certainly not the shareholders’.

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