Persuading Koizumi: to walk the walk

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See the Sol Sanders Archive By Sol Sanders SPECIAL TO WORLD TRIBUNE.COM

There is an old saw that the only problem Argentina, so richly endowed, has is Argentineans. At a time when it is again imploding, we look to the other end of the world where Japan has demonstrated how resources are not necessarily the all-important ingredient of prosperity, to find another economy defying logic.

More than a decade out from the bursting of The Bubble Economy — the world’s second largest and during the post-World War II the engine for the rest of Asia is stalled. “The Japan Model” became suspect and there was a supposed consensus for change. Japan’s economy, nay, its society, was to go through reformation that would fit it for a new leading role in the changing global economy. That was the recipe of critics at home and abroad — although many overseas seemed never to have understood what a different entity Japan was from its industrial cousins in the West.

Prime Minister Koizumi the most popular postwar politician with his modish style and huge appeal to younger Japanese seemed the ideal figure to lead “the new Meiji restoration”. It was a terribly ambitious program. Japan was to abandon its vaunted top-down economic direction. A highly regulated — through unseen “administrative guidance” — economy was to be deregulated. Bloated government corporations were to be privatized, or abandoned. The many [often cleverly disguised] restrictions on foreign entry into the both the merchandise and financial markets were to go. Most of all, Japan’s opaque, incestuous banking system was to be opened and refinanced. All this would liberate Japan’s genius for the new period of growth and progress.

But as the New Year begins Japan is lapsing into deepening recession. A business survey predicts the economy will continue to deteriorate until mid-2002. All indicators are down or falling. Masaru Hayami, Bank of Japan governor concedes a financial institution might collapse. Koizumi’s new budget has trimmed back public funding, which since the early 1990s through a dozen economic stimulus packets done little to boost the economy and only made the nation's public debt the worst among industrial countries.

Much of the trumpeted shuffling has really only been sleight of hand that has not changed their fundamental character. And, in some instances, it may have even strengthened the old bureaucratic and monopolistic characteristics of Japanese capitalism. Ironically, this is in part because Koizumi’s Liberal-Democrat Party — those factions most opposed to his professed reforms — have been strengthened in the last upper house elections by his popularity which rubbing off on an otherwise discredited ruling elite.

Some observers are speculating that a crackup — for example, a forced nationalization of the banks — in the coming quarter may be the “bottom” that will force genuine reform.

While this continuing crisis works its way out at home, Japan’s role outside is very much in play. Its trading partners in Southeast Asia, annoyed with cutbacks in aid investment, and continued limited access to its domestic markets, have threatened to make a deal with China for a common market. That’s more bluff than real threat — Vietnam’s ASEAN partners know a flood of cheap Chinese imports has virtually stifled what little industry existed there.

But the threat of a highly competitive China — increasingly even in the hi-tech fields — is becoming a concern of Japanese business even as the daily headlines announce their new investments in China to exploit its lower costs for export to third countries. “The China issue” blew up earlier this year when Japan slapped a tariff on leeks, shiitake mushrooms and igusa rushes [used to make tatami mats] — which threatened the critical LDP rural constituency. That led to Beijing responding with a 100% tariff on Japanese automobiles. The stalemate which raised the temperature on all issues between the two countries was resolved — but with an inconclusive Chinese promise to monitor such exports. Shades of all the Tokyo-Washington arguments over Japanese exports to the U.S.!

With the U.S. and Germany both headed into recession, Japan’s economy has become more than ever a concern of Bush Administration policymakers. Koizumi has made points with Washington for his support of “the war on terrorism”, adroitly bending the “no war” Japan constitution to dispatch Tokyo’s Self-Defense Forces to the Indian Ocean. The differences between Japan and the U.S. over what form anti-missile defense should take are for the moment muted.

But when Treasury Secretary O'Neill visits Tokyo in late January to confer on Afghan aid, how to get Koizumi to “walk the walk” of reform will be on the agenda. Washington — torn between urging the Japanese to inflate its way out of deflation, and the increased import pressure on America in recession with lower yen prices — is no easier than the decisions the Japanese will have to make.