Land of the Setting Sun?


By Brian Bremner Japan's ceaseless stagnation, banking crisis, and truly ineffectual political system will surely be a source of fascination to future economic historians. They will gasp at how, in the largest peacetime capital shifts in post-war history, Japan swung from being a rich country with a huge surplus to a recession-ridden giant with a huge deficit. They will delve into the mysteries of Japanese deflation and its monetary liquidity trap.

Its gold-plated corruption, revolving-door Prime Ministers, and powerful -- but unaccountable -- bureaucrats will interest political scientists. Historians will pore over how Japan spent more than $1 trillion on infrastructure and economic stimulus, and still couldn't end its never-ending story. It will all make quite a rich feast for enterprising Japan scholars for years to come.

GROWING DOUBTS. But what if Japan never recovers? Seriously. What if this isn't just a case of a rich, conservative country merely dragging its heels over tough and painful reforms? All through the 1990s, even the most bearish observers held some long-range optimism for Japan. Surely, the country's leadership would awaken from its slumber, they believed. The old ingenuity, the killer instincts, the hunger of Japanese business would come roaring back -- and so on. But what if it never happens?

This is far more than an intellectual debate. With President Bush now expected to visit Japan in mid-February, top advisers are starting to wonder whether the country will be much of an ally, economically and diplomatically, if it continues its slide. Prime Minister Junichiro Koizumi certainly faces an arduous task. He has been in office nearly a year, and Japan's economic problems have only worsened. If this is crisis management Tokyo-style, it's extremely hard to see much of a bright future for this remarkable society.

Perhaps it's worth considering the arguments about Japan's way out its mess that optimists -- including yours truly -- have pitched over the years. Here are some of the more memorable ones.

Recession, What Recession?

You usually get this one from visiting execs in the lobby of the Imperial Hotel in Ginza. "Jeez," says the newly arrived visitor. "I keep reading in the papers back home what a hopeless mess the Japanese economy is these days. But I don't see any homeless, Ginza seems fairly robust, and isn't Japan rich enough to take care of its problems on its own time?"

Plenty of folks still think this is true, as I did back in the mid-1990s. But my guess is that the current recession, unlike previous ones in the past decade, is going to sting a lot more. Japan's jobless rate, which is understated, is 5.6% and climbing. And given the overcapacity in one industry after another, it will certainly get a lot worse. The Japanese government doesn't expect any serious growth until 2004 at the earliest.

Get off the Ginza strip, and you'll see that the homeless population is growing. Just check out Shinjuku in central Tokyo or Umeda Station in Osaka. Times are tough in rural areas like Niigata. In the past couple of years, 30,000 Japanese have taken their lives annually, and sociologists and government health officials see a clear link to economic woes.

The talk at the recent World Economic Forum in New York City was that Japan is an economic has-been. Meanwhile, the folks at Standard & Poor's (like BusinessWeek, a unit of The McGraw-Hill Companies) have just introduced "bank survivability assessments" for Japan's big money-center banks. It's a complex evaluation -- and first introduced by the ratings firm in Latin America, of all places.

Here's what I've concluded: What's happening to Japan isn't a passing squall but a steep secular decline that will be very tough to recover from.

Remember the Meiji Restoration

The Japanese may be ultraconservative, wedded to established ways, and the like. But when this society makes up its collective mind to change, hey, watch out. Think of the social overhaul during the Meiji era that led to the fall of the Tokugawa Shogunate and spawned sweeping reforms. Think of the dynamic young leaders of the time. They turned their backs on feudalism and pushed Japan into industrialism.

The basic assumption here is that without people being aware of it, a big cultural shift is going to take place in Japan and, poof!, the economy and society will be revitalized. The Meiji revitalization lasted 44 years, until 1912, according to Japanese historians. There were rebellions to put down, hyperinflation early on, wars with Korea and China. All in all, it was a remarkable era for Japan, and a prosperous one, too.

But so what? The unique problems of early industrialization and catch-up Westernization don't tell current Japanese leaders very much about how to transform a stagnant industrialized economy with a rapidly aging population. Ditto for how to grapple with the reality that China, not Japan, will be the world's No. 2 economy by 2030, according to a recent forecast by Lehman Brothers.

Japan Has No Choice But to Reform

This is probably the most seductive argument by the optimists because it boils down to a basically circular one. Japan will change, because it has to. Unless you buy the notion that Japan has some sort of societal death wish, somewhere along the way its survival instincts will kick in. Gutsy leaders will step forward, tough decisions will be made, and things will gradually get better.

You hear this all the time from Koizumi and his top economic advisers: "We face ruin unless we change. We have no choice. It's going to hurt, but we will get through it."

Well, I still think this is true. I just wonder if Koizumi and his team really get it anymore. The Nikkei now trades below the Dow (see BW Online, 2/04/02, "Back to a Sorry Future for the Nikkei"), and the Japanese economy is the sad joke of the global economy. When Treasury Secretary Paul O'Neill declared to an auditorium full of journalists and business executives recently that the "Japanese miracle" is far from over, you could see a lot of disbelieving eyes in the room.

If the worst comes to pass and Japan cedes economic leadership and settles for a secondary role in Asia, maybe it'll be some enterprising cultural anthropologist who comes up with the best explanation. One hopes it doesn't come to that. Both economically and culturally, Japan has much to offer the world. But as year after year of inaction goes by, the optimists' case is becoming ever so tortured. Bremner, Tokyo bureau chief for BusinessWeek, offers his views every week in Eye on Japan, only for BusinessWeek Online


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