The land of the sinking yen is in economic crisis. Keith Harper in Tokyo asks what’s going wrong
JAPAN’S emergence as an economic superpower, second only to the United States, had been – until the 1990s – one of this century’s most dramatic changes in the global pecking order.
But as the yen soared to new heights against the dollar at the start of this decade, the cracks in Japan’s industrial, political and financial structures began to emerge. Japanese products, which in the 1970s and 1980s were the best made and most price competitive in the world, lost their allure. Like the multinationals in Europe and North America, the great trading houses were forced to move production offshore to their more competitive neighbours in the Pacific Basin, Britain and North America.
The completion of the Uruguay trade round – designed to open Japanese markets – and the decision by the seven strongest economic powers to devalue the yen against the dollar brought about long-awaited relief.
There was a belief that Japan could halt the economic decline, and the lack of initiative and dynamism that kept it in recession during much of the present decade. At the start of 1996 it looked as if the sleeping giant would be aroused from its slumber.
For a few months the West breathed again: growth in Japan would counteract the slowdowns expected in the US after a prolonged expansion and in Europe as it adjusted to monetary union.
However, there is growing evidence that a longer-term cultural, political and economic malaise may see Japan left behind by its flourishing Pacific neighbours.
Consumer spending, which accounts for 60% of the economy, dropped last November by 4,6%- one of the biggest monthly falls on record. Government officials, wishing to make light of the drop, cite the adverse impact of a cool summer and an outbreak of food poisoning on retail and restaurant sales. But consumers have kept their wallets shut for years.
While Japan’s most important multinationals have shown signs of recovery, the domestic economy is stuck. Over the past quarter, it has grown by 0,1%. This year, the Nomura Research Institute estimates, Japan’s gross domestic product will improve by little more than 1%.
Enter Professor Hiroshi Takeuchi, chairman of Japan’s long-term credit bank research institute and a top government adviser. He is leading a task group to investigate ways of encouraging tourism on a grand scale, bringing in not just the Koreans and Taiwanese, but Americans and Europeans and, although it almost hurts him to say it of Japan’s natural enemy, the Chinese.
To launch the initiative, Takeuchi intends to tap the latent talent of thousands of Japanese wives who have toured overseas with their husbands. They will take charge of a network of new information centres in every town and city.
As Takeuchi contemplates this upheaval in Japanese culture, he also ponders what life could be like if his country does not take this leap into the unknown. The yen continues to float against the dollar and in the long term, he believes, the rate will decline to 150 or even more. Into this uncertain pot, he stirs the drift away from Japanese factories to parts of Asia where labour is cheaper – and to Britain. Some 10% of Japan’s production is now outside the country and the gap is widening.
All this could set the stage for a long- awaited showdown between opposing forces in the political establishment. Since his re- election, Prime Minister Ryutaro Hashimoto has undertaken a broad reform of Japan’s heavily regulated economy.
But it will be tough to persuade the bureaucrats to dismantle the well-tried system of shielded domestic markets, inflated prices at home and strong exports.
Hashimoto has to act. Unless he takes a knife to Japan’s excessive living and wage costs, consumer demand will lag and firms will search for cheaper accommodation abroad.
But it is not all gloom. Hashimoto is showing signs of hitting back at Japan’s conformist protectionism. Faced with official forecasts that, without reform, the country will be lucky to achieve long- term growth of 1,75%, he has announced a shake-up of the financial markets.
A decision to break up the Nippon Telegraph and Telephone Corporation to spur competition is in the offing, and the cabinet is drawing up a much broader package to revitalise wholesale, retail, housing and transportation markets in the new year.
It will be a slow process, because the Japanese are a conservative people, but nothing else has worked. The days of Japan’s double-digit growth are gone. Japan’s twin policy of financial reform and deregulation and the opening of its frontiers to streams of visitors may work. But Japan will have to countenance a swifter change than it has so far been ready to concede; otherwise, the more confident tigers will take over her lair.