Little Hope Abroad for Economic Recovery in Japan

John de Boer (University of Tokyo)

With fears of a financial crisis in Japan rising, outsiders are starting to speak up and are pressing Japan to take quick action. Nevertheless, most foreign media sources are skeptical about PM Koizumi's ability to carry out reforms and are beginning to portray a Japan headed for the economic abyss. Comparisons to Argentina have been made and the US Treasury Secretary among others issued harsh criticisms of Japan's fiscal policy. The following is a brief summary of how the foreign media has described Japan's economic situation and drafted its potential fate.

While individuals such as former UK ambassador to Japan, Hugh Cortazzi, tried to remind people of Japan's strong fundamentals by highlighting its huge dollar reserves, strong exports, healthy balance of payments, competitive manufacturers and skilled workforce ("Tokyo's Games Go On: Hardly another Argentina", Japan Times, January 14, 2002), positive descriptions of Japan's economic outlook were hard to find. Clay Chandler of the Washington Post ripped Japan's economy apart by pointing out that consumption was flat, investment was sliding, exports were going into a tailspin and that the economy was about to enter its 3rd consecutive contraction as a result of record corporate bankruptcies and unemployment coupled with the worst public debt ratio in the industrialized world (January 20, 2002).

After witnessing a 10 per cent devaluation in the Yen versus the Dollar over the past month, US Treasury Secretary, Paul O'Neill came forward with an explanation that this was a deliberate policy implemented by Japanese officials and warned against further devaluation. Paul O'Neill's criticism was taken up by London's Financial Times which also outlined the US blueprint for Japanese economic reforms as presented by O'Neill. According to the US, priority areas for economic clean up should be focused on recovering bad loans, loosening the monetary policy in order to stem deflation and implementing a comprehensive program of deregulation to introduce more competition ("US gives Japan a push on economic reforms", January 23, 2002). Of course these priorities have their links in US corporate interests who have balked at the rapidly lowering Yen. According to Edward Alden of the Financial Times, Frank Vargo of the National Association of Manufacturers (US) has lobbied the US government to prevent the Yen from sliding any further for fear that Japanese car sales in the US would rise (January 21). In response, Paul O'Neill told Japanese officials to stop relying on exchange rate based recovery. "Exchange rates cannot improve productivity or fix non-performing loans" stressed O'Neill. "The weight of historical evidence shows that those who have tried to fix underlying economic problems with protectionist measures actually weaken their own economy" ("US gives Japan a push on economic reforms" FT, January 23). As evidence the International Herald Tribune cited that Japan's trade surplus shriveled to an 18 year low, marking the sharpest drop since 1970 (January 25). The message was that as long as Japan's trading partners remained in a slump, export volume would fail to rise despite the low Yen rate.

Nevertheless, an unnamed US official quoted in the Financial Review did claim that the US could tolerate a declining Yen as long as there were "news headlines that American companies were buying Japanese companies" (Financial Review, Jan 24). In other words, if Japan allowed US investors take advantage of a weak yen a certain level of decline was acceptable.

The majority view is that Japan sees doing nothing as wiser than a dose of painful economic reforms (International Herald Tribune, Jan 24). PM Koizumi has been portrayed as bowing to corporate interests (The Economist, "Another missed chance", January 19) in relation to the consolidated corporate tax and seems both unable and unwilling to call the Financial Management Conference Board (a financial brain trust made up of the PM, the Chief Cabinet Secretary, the Finance Minister, the Governor of the Bank of Japan and two of Japan's top financial regulators) to meet for serious discussions. The reason being that such a meeting would indicate that Japan was in crisis. Ken Belson stated that Koizumi is in a no win situation (International Herald Tribune, January 24). Declaring a crisis would cause voters and investors to lose faith in his ability to overhaul the economy while doing nothing simply prolonged the pain and contradicted his "reforms with no sacred cows" principle. In fact, claimed the Washington Post, Koizumi has made a political U-turn, "he still talks about reform but the government is in retreat" (January 20).

The outlook on Japan's economic recovery as presented by the foreign press is extremely negative. There is no faith in the Japanese economy or its leadership. There is a total absence of an international and domestic willingness to cooperate. Ultimately, the fate of the Japanese economy and the Japanese public at large is in limbo. The picture is bleak and leaves little hope for the near future.

Articles:

• Yuri Kageyama, "Fears loom of Japan financial crisis", The Associated Press, January 27, 2002
• "Japanese trade surplus shrivels to 18 Yr low", International Herald Tribune, January 25, 2002
• Peter Hartcher, "Its growth that Washington wants from Tokyo", Financial Review, January 24, 2002
• Ken Belson, "Japan has plan to fix banks, but does it have the will?" International Herald Tribune, January 24, 2002
• Edward Alden, "US gives Japan a push on economic reforms", Financial Times, January 23, 2002
• Edward Alden, "Pressure for O'Neill to tackle Japan on falling yen", Financial Times, January 21, 2002
• The Economist, "Another missed chance", January 19-25th, 2002
• Clay Chandler, "Japanese leader defying the political odds", The Washington Post, January 20, 2002
• Hugh Cortazzi, "Tokyo's Games Go On: Hardly another Argentina", The Japan Times, January 14, 2002