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June 9, 2003

Change Hasn't Halted Decline

Hugh Cortazzi (Former British Ambassador to Japan)

I was invited recently to Japan to speak to two Japanese audiences about the Japanese economy as seen from London and what should be done to ensure Japanese economic recovery. I prepared a speech that was pessimistic. This was inevitable as British reporting on the Japanese economy is full of doom and gloom as is much of the Japanese press. I added some personal notes, such as that the Japanese had gone too far in their loss of self-confidence.

I reiterated my long-held belief that Japanese economic recovery is, to a significant extent, dependent on political reform in Japan. By reform, I mean essentially the undermining of the power of factions and interest groups in the ruling party through a real attempt to equalize the votes in rural and urban constituencies, significant curbs on money politics and a political realignment that ensures effective opposition in Japan.

The Liberal Democratic Party, which has controlled the government for more than half a century, is neither "liberal," in the generally accepted definition of this word, nor really "democratic" in its structure, despite the apparently democratic way in which its president is elected. Certainly ordinary Japanese vote for the party because there is no effective alternative. The LDP is not a party with an accepted ideology. It is essentially a grouping of factions where loyalty is more to personalities than to principles, and where control of political funding is the key to advancement.

Despite Prime Minister Junichiro Koizumi's insistence that he sought office to adhere to principles even if that meant busting up the LDP, I don't see any sign that he is willing or ready to do so.

When we arrived in Japan in early May, one of the first visits we made was to the new Roppongi Hills complex in Tokyo, a staggering development. The Japanese economy was supposed to be in decline with deflation holding sway, but in the new complex, luxury boutiques and high-class restaurants had taken out leases. We surmised that in the best restaurants it was not possible to get a reservation for days, if not weeks. Even if this was exaggerated, there was certainly no sign among the crowds of the dreaded word "recession."

Tokyo's so-called "high speed" roads seemed just as clogged as ever and Roppongi just as raucous. The main superficial sign that things were not quite what they seemed were the rows of empty taxis and a few cheaper taxis on the streets. Another sign was the many "100 yen" shops suggesting that Japanese prices were coming down.

Prices for electronic items have certainly declined, but I wondered whether this was due more to increased competition, manufacture in low-cost China or mere technological improvement. We did not do any general food shopping, but we noted that prices of fruit still remained two or three times what we pay in London. Was this simply because of the outdated protectionist policies of Japan's Ministry of Agriculture determined to help a declining agricultural population, the maintenance of unnecessary regulations designed to protect existing distributors or unnecessary food-safety measures? Perhaps all three factors had to be taken into account.

Superficial impressions are only marginally relevant. Looking below the surface and reading the Nihon Keizai newspaper and other journals, I had to conclude that the pessimistic view from London was probably justified. Koizumi's government's efforts to achieve deregulation have been too little and too late. Interested bureaucrats and interest groups (through "zokugiin") seemed to have succeeded in limiting the effects of changes made or proposed by Koizumi's government whether in relation to privatization of the postal services or to "special zones" where regulations were to be minimized. National interest was still being sacrificed to special interests.

Psychological effects of the decline in growth are disturbing. The term "shichi-go-san" (7, 5, 3) generally refers to the autumn festival when children of these ages are taken to shrines to be blessed. There are sadly fewer such children these days, with Japan's net reproduction rate down to 1.32. Combined with a population whose average age is rising rapidly, this figure has serious implications for Japan, which nevertheless remains reluctant to allow immigration. Instead, I noted from a newspaper article that the term "shichi-go-san" now seems to be used in the context of the employment of young people: 70 percent of youngsters go from middle school into employment, while 50 percent of those from high school and 30 percent of those graduating from universities leave their first jobs within three years.

Such figures would not seem surprising in Britain, but they do indicate a real change in Japan, suggesting a freer labor market. This would be beneficial if the prospects for employment of young people in Japan were better. Unfortunately they have deteriorated. Certainly we must welcome the end of excessively long hours (with, let us hope, fewer deaths from overwork) and the advent of more leisure, but the "freeter" phenomenon persists and the work ethic is being eroded.

I try not to fall into the trap of thinking of Japan in terms of cliches such as "the more things change, the more they remain the same." In fact, there have been huge changes in Japan in every area, not merely over the past 57 years since I first went to Japan but particularly over the past decade. The fundamental question, though, is: Have the changes been sufficient and quick enough to ensure that the Japanese economy and political system will thrive? The answer is sadly no.

I don't see Japan going bust despite such phenomena as the huge nonperforming loans of the banking system, overinvestment in rural infrastructure and the damaging fall in profitability (and consequent fall in share prices). But I don't think that the Japanese economy can or will quickly emerge from its current malaise. The signs at present seem to be for a continuing if slow decline.

(This article originally appeared in the May 29, 2003 issue of The Japan Times)

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