How Big of a Risk is Japan to the World Economy?

John de Boer (University of Tokyo)

The G-7 issued an overly optimistic statement this week contradicting almost every news report coming out of the second largest economy in the world. The statement read, "since we last met, prospects have generally strengthened for resumed expansion in our economies, although risks remain" (Reuters, Feb 10). For almost anyone who read the newspapers this past week, the "risks remain" qualifier pointed to a Japan on the verge of financial collapse with the potential to trigger a global depression.

No one is convinced that Japan is anywhere close to implementing real reforms. After hearing Finance Minister Shiokawa detail the government's plans for reform, US Treasury Secretary, Paul O'Neill was quoted by Reuters as saying, "no novel ideas have been advanced" (Feb. 10). The German Deputy Finance Minister, Caio Koch-Weser also voiced his skepticism about reforms being pursued.

While the G-7 statement called Japan a risk, many major news sources warned of a full-blown financial crisis. As Japanese shares hit an 18 year low on February 5, Forbes recalled Thailand's financial crisis, claiming that Japan's will dwarf problems faced during this crisis of 1997 ("Japan's Death Spiral?" Forbes.com, Feb. 5). The same article quoted former Federal Reserve Board Chairman, Paul Volckert saying that, "he couldn't recall in his career a touchier global economic situation".

In conjunction with tumbling stock values, the two main ratings agencies, S&P and Moody's, affirmed Volckert's fears by downgrading seven major banks and placing seven large life insurers under review. According to Brian Bremner of Business Week, the S&P introduced "bank survivability assessments" for Japanese banks, assessments first introduced in Latin America ("Land of the setting sun?" Feb. 7). Noting the critical state of the Japan's economy, Benjamin Fulford also of Forbes wrote that, "we can no longer safely shrug off Japan's economic crisis" and warned that "it just might drag the world into a depression". Pointing at Japan's various indicators Fulford compared Japan's situation to that of the US immediately prior to the Great Depression of the 1930's and called panic. Japan was no Russia, Argentina or Thailand, "in fact" stated Fulford, "it is potentially something far worse" (Fulford, "Panic Spreads", Feb. 8).

Japan's situation over the past 12 years has been a phenomenon that has puzzled many. So intriguing claims Brian Bremner, that "economic historians will be fascinated by how Japan swung from being a rich country with a huge surplus to a recession-ridden giant with a huge deficit". Political scientists will be amazed by the "gold-plated corruption, the revolving-door PM's and the powerful but unaccountable bureaucrats" ("Land of the setting sun?" Feb 7).

What people are finally starting to realize is that Japan's inability to fix its economy is not just a case of dragging its heals over tough and painful reforms. Bremner goes so far as to claim that top observers are wondering whether Japan will be much of an ally diplomatically or economically if it continues to slide. According to Bremner, the World Economic Forum concluded that Japan is an economic-has been (Bremner, "Land of the setting sun?") and in response investors are starting to sell Japan.

Once upon a time, PM Koizumi enjoyed the longest honeymoon in recent Japanese political history. He now finds himself in the midst of a horrible nightmare. With popularity declining he has few people to turn to and having failed to push through an early implementation date for recent medical fee reforms little faith remains in his ability to realize meaningful structural reforms. With President Bush visiting Japan this week, Koizumi will no doubt begging for his help. Lets hope that unilateralism is not the only agenda that Bush will push.

Articles:

• Tamawa Kadoya, "Japan seeks to asure G', others not so convinced", Reuters, February 10, 2002
• Benjamin Fulford, "Panic Spreads", Forbes, February 8, 2002
• Brian Bremner, "Land of the setting sun?" Business Week, February 7, 2002
• Michiyo Nakamoto, "Koizumi's LDP stalls health reform," Financial Times, February 7, 2002
• "Japan's death spiral?" Forbes.com, February 5, 2002
• "Japan shares hit 18 yr low", BBC, February 5, 2002