JAPAN: Painful Changes Can Boost Financial Muscle — Experts

   By Tim Shorrock

WASHINGTON, Oct 11 — As Japanese Prime Minister Junichiro Koizumi moves forward on his government's plans to clean up the country's bad loans, he should also be formulating policies to maintain the competitiveness of its most advanced industries and expand the employment base.

Yakushiji Taizo, a professor of political science at Tokyo's Keio University, said an industrial policy set by the Koizumi administration would complement the work of Heizo Takenaka, who was recently appointed by the prime minister to clean up Japan's banking system as head of the Financial Services Agency (FSA).

Takenaka shook up the Japanese business establishment in early October when he said that no Japanese company was "too big to fail".

He also indicated that the FSA would act soon to end the government's traditional practice of allowing banks to roll over their loans instead of forcing bad debtors out of business. From March 1999 to March 2002, the amount of bad loans held by Japanese banks increased from 355 billion U.S. dollars to 437 billion dollars.

Without the dramatic actions Takenaka has proposed, many analysts believe Japan could face a financial meltdown that would make it impossible for companies to borrow money — and throw millions of people out of work.

"We need a political base to implement what Takenaka is thinking about," Yakushiji told a seminar on the Japanese economy organised by the Sasakawa Peace Foundation. "We have to touch on how we can do industrial revitalisation."

Specifically, Yakushiji said, Koizumi's Cabinet needs to formulate policies that will help Japan's most competitive companies, including Toyota, Canon, Sharp and other world-class producers, maintain their lead in global markets.

Although many people believe Japan's competitiveness is gone, "the truth is, Japanese technology is still very strong," said Yakushiji.

He pointed to recent surveys by McKinsey and Co showing that top Japanese firms are 20 percent more productive than their U.S. counterparts and mentioned some of the country's recent industrial innovations, such as the hybrid car engines powered by both electricity and gas.

An industrial policy, Yakushiji said, would also have to raise the performance of Japan's second-tier companies, such as in the semiconductor industry, which are losing their competitiveness internationally and have too much industrial capacity.

It would have to address the structural weakness of Japan's construction, retail and agricultural industries, which lack any competitiveness, are highly dependent on government spending yet account for 90 percent of Japanese employment. In contrast, Japan's first-tier companies account for only five percent of the country's employment.

"Unless we solve this problem, how can we solve Japan's economic problems?" he asked.

Peter Ennis, the editor of the 'Oriental Economist' and a long-time observer of the Japanese economic system, agreed that jobs and employment is Japan's number one problem. "Japan is stuck between a system that doesn't work and a new system that is yet undefined," he said. "The key issue is unemployment."

According to Ennis, most of the Japanese economy does not face international competition, while the construction, food processing and retail industries employ far more people than all of Japan's key manufacturing industries, including steel, automobiles and electronics.

"Reform in Japan means unemployment; dealing with non-performing loans means unemployment," he said. "Japan must go through a very profound transformation to catch up to the modern world."

Japan's shift from a producer-oriented to a consumer-oriented economy should have taken place 30 years ago, Ennis said. The ruling Liberal Democratic Party, which has been in power since 1955, "delayed and postponed the tough decisions," he said.

Specifically, he blamed the delay on the paternalistic, construction-oriented development pushed by former Prime Minister Kakuei Tanaka. "Tanaka and his machine held it (Japan) back."

Real reform in Japan, which Ennis said must include "fluid capital markets" which direct investment to the most productive sectors of the economy, will take at least 10 years, the New York-based journalist said. "But it will happen because Japan is a great nation."

As for the banking crisis, Japan has "too many resources to avoid a financial cataclysm," Ennis said.

The most likely scenario is a series of political crises that end with the LDP finally breaking up. That would be good for Japan because it would free the economy from its "institutional straitjackets," he said.

Yakushiji, too, said a political change was necessary. Japan has "too many senior people in important posts" who stifle innovation, he said.

In a reference to the purge of leftists from Japanese unions ordered by the U.S. occupation under Gen Douglas MacArthur — whose rule is remembered by Japanese as the "GHQ" — Yakushiji said "we need another red purge like the GHQ's".

Within the banking industry, Japan needed executives willing to decide "which companies to put out of business", said Adam Posen, a senior fellow at the Institute of International Economics and author of a recent book on the Japanese financial system.

Posen agreed that Japan's "terrible banking system" had "eviscerated the tremendous productive capacity of Japan". In addition, the "Japanese government and its politicians betrayed the Japanese people."

But Posen said he is optimistic because the high level of Japanese technical innovation remains unchanged. "Nothing fundamental has really changed from the 1970s and 1980s," he pointed out. With a "functioning banking system, Japan's problems could fix themselves." (IPS/2002)