Does Japan really want to stay competitive?


LONDON — The reported remarks to members of the foreign press in Tokyo on Oct. 14 by Shizuka Kamei, Japan’s minister for financial issues, made me wonder whether he was living in the real world — where nations are interdependent and must compete to survive.

Was he just dreaming about an idealized and imaginary Japan when it was hailed as “No. 1” economically?

His statements, if correctly reported, were strongly and unjustifiably anti-American and critical of market-based capitalism. His criticism of the attempts by Junichiro Koizumi to liberalize the Japanese economic structure to ensure that Japanese industry remains internationally competitive struck me as not only unfair but also regressive.

Although Japanese mercantilist policies in the latter part of the 20th century may have contributed to the short-lived era of Japan as No. 1, they led to serious trade friction and deterred foreign investment. They also exacerbated the crisis that hit the Japanese economy when the bubble in rising asset prices burst.

Japanese banks, which had dominant positions in the financial markets of London and New York, suddenly found that foreign institutions no longer wanted to trade with them. Kamei’s call for a moratorium on loans to small- and medium-size businesses creates a serious moral hazard. Japan needs efficient banks with proper protection for depositors and savers.

The abolition of capital adequacy requirements, if implemented, would jeopardize the safety of deposits and would push Japanese banks, which had recovered in many of their former markets, back to pariah status.

The attack on capital adequacy rules also puts Japan at odds with other Group of 20 countries and will damage Japan’s credibility in international efforts to ensure that the financial crisis does not recur.

Kamei’s apparent intention to subsidize some Japanese companies with a debt moratorium will arouse accusations that Japan is promoting its own firms in ways contrary to Japan’s international trade obligations. It seems inevitable that if such policies are pursued Japan will also feel compelled to revive nontariff barriers against foreign imports. Such actions would inevitably exacerbate trade friction and would deter foreign direct investment that the Japanese government has wisely been trying to encourage to increase Japan’s ability to compete in the world.

The Japanese stock market is in the doldrums. It has been sustained to a considerable extent by foreign purchases of Japanese equities. Foreign investors were led to believe that Japanese companies were finally attaching greater importance to shareholders and would increase the payment of dividends. Kamei seems to disapprove of shareholder demands and to think that their right to share in the profits comes well below that of other stakeholders.

This attitude could deter foreign purchases of Japanese shares and lead to further underperformance in the Japanese stock market. That in turn would have an impact on Japanese shareholders, many of whom are elderly and retired. It will also have damaging implications for Japanese pension funds.

We must sympathize with those who become unemployed in the current recession, and it is right to expect employers to show due consideration for their workforce. Unfair dismissal and workplace bullying can and should be dealt with by employment laws and tribunals. But if Japanese companies are to compete in the international market place, they must ensure that their costs are kept under control.

Kamei’s prescriptions are likely to lead to increased unemployment. Companies will become reluctant to take on new staff if they can only do so by taking them on as permanent employees. The recent liberalization of the employment market in Japan was necessary to ensure that Japanese companies remained internationally competitive.

In the modern world, few people anywhere should expect jobs for life. Greater employment fluidity is inevitable. Temporary workers deserve a better deal, but this can be more easily achieved by statutory provision governing work conditions than by forcing companies to increase their permanent workforce.

Kamei’s apparent belief that former Japanese employment practices created a kind of paradise for Japanese workers is far from the truth. As many observers — Japanese and foreign alike — have noted, “permanent employees” at Japanese companies had to sacrifice a great deal in return for their employment security: For example, they could be transferred within Japan or abroad at a moment’s notice without due consideration given to their family circumstances. They were expected to work long hours and “socialize” in bars with their workmates until the early hours of the morning. Many had to neglect their families. Some died of overwork.

Kamei asserted that “Japanese companies no longer treated their employees as human beings.” I doubt this is true and don’t believe that life in the old days was the paradise he describes. His insistence that Japan “return to the traditional style of Japanese management” is likely to reduce Japan’s capacity to compete in the world and undermine the revival of the Japanese economy at a crucial point in the economic cycle.

If, as Kamei is reported to have told correspondents, Japan Business Federation president Fumio Mitarai “hung his head” when Kamei made these remarks, it may be because Mitarai was wondering how a politician of Kamei’s caliber could have been given such a responsible job in the Hatoyama Cabinet.

The Japanese economy, if it is to prosper, needs further liberalization and more effective measures to encourage competition. These do not mean “market fundamentalism,” but they are necessary to keep the Japanese cost of living down and enable Japanese firms to prosper.

Supervision and regulation are necessary when the market has become distorted as in the current financial crisis, although the market is a better mechanism than the state for directing capital and labor.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.