Montreal Forum Report: Comment on Mr. Honda's Article "Will the Sun Rise Again?"

Takahiro MIYAO (Professor, GLOCOM, and Head, Japanese Institute of Global Communications)

(This is based on the comment that Prof. Miyao made on Mr. Honda's presentation at the GLOCOM-UQAM Forum in Montreal on November 24, 2003)

I found Mr. Honda's article very insightful and encouraging. It offers an optimistic view of the Japanese economy under the Koizumi administration with emphasis on structural reform. One important assertion that Mr. Honda makes in his article is that Japan's balance sheet problem should be resolved in the next two years. He also states that IT likely will transform Japanese business organizations as well as management practices, resulting in higher productivity that could help Japan overcome the long-term problem of aging and declining population.

While I do not disagree with much of his argument, I would like to point out some negative aspects of the Japanese economy as the phenomenon of polarization is becoming quite visible. I also believe that emphasizing only positive aspects and not negative aspects is likely to give a biased view of the Japanese economy as a whole.

First, Mr. Honda's statement that Japan's balance sheet problem should be revolved within the next couple of years seems to me to be too optimistic. While it is true that the ratio of non-performing loans appears to be leveling off for major banks, such ratios are still increasing for many of the regional and local financial institutions as exemplified by the recent failure of Ashikaga Bank. The situation won't improve until deflation stops and asset prices turn around. That means that the balance sheet problem is far from over and could get even worse in the near future, contrary to Mr. Honda's claim.

Second, IT and globalization could change the Japanese economy for the better, as Mr. Honda has predicted, but it might well lead to polarization in the economy and society in which a small number of global businesses will prosper while a large number of small and medium-sized corporations tend to suffer. There also might be geographical concentration of economic prosperity, especially in the center of big cities like Tokyo, whereas local regions could be left behind--suffering from the hollowing-out effect as more economic activities leave for larger cities or even neighboring countries.

Finally, I do not share Mr. Honda's strong sense of appreciation for the Koizumi reform, because in my view there has not been much progress in reforming the Japanese system. No substantial economic policies have been adopted by the Koizumi administration to deal with the asset deflation problem that is the cause of the balance-sheet recession, or to mitigate the trend of excessive polarization that is resulting from the IT revolution and globalization, as pointed out above.

Unless the Japanese government wakes up to address these key issues, the sun won't rise again. It could get even darker before the dawn breaks, if ever.