Will Japans economic reform programme deliver, asks Victor Keegan
It was 8.45am and Dr Shoichiro Toyoda, chair of Toyota and of the Keidanren employers organisation, was explaining Japans planned Big Bang reforms. The office block shuddered. Tokyo was experiencing one of its periodic earthquakes. Fortunately, at 5,2 on the Richter scale this was only a little bang.
The incident may be a metaphor for the Japanese economy if, as seems increasingly likely, the governments reforms turn out to be a damp squib.
Japan led the world in re-engineering its manufacturing base during the past few decades and is now planning to fine-tune the rest of the economy not a moment too soon.
For five years the economy has hardly grown as it struggled to adjust to the collapse of shares, land and other asset prices. Last years 3,6% expansion was a false dawn. People were buying in advance to dodge the proposed rise in consumption taxes from 3 to 5%.
Last months gross domestic product (GDP) figures showed that the economy was contracting (a condition almost unknown in Japan) at an annualised rate of 11% in the second quarter despite buoyant exports.
The government cannot use monetary policy to kickstart the economy because the bank rate has been dropped to 0,5%, the lowest in the world, to prevent more cash-strapped financial and construction companies from going belly-up.
Nor will it cave in to United States demands to boost domestic consumption. It argues that the hike in the consumption tax was necessary to bring the budget deficit, now more than 5% of GDP, down to nearer the Maastricht norm of 3% (which seems to have become an international benchmark).
Japan is now in the middle of a rethink. The period in which it sought to equal or surpass America and Europe ended with the Eighties. Japan had become an awesome force in manufacturing, which only served to emphasise chronic inefficiencies in distribution, agriculture, financial services and bureaucracy.
Business leaders and politicians looked enviously at Britain, which embarked on an orgy of reform embracing privatisation, deregulation and the abolition of exchange controls before anyone else. Japan sees deregulation as its next source of growth and its own version of Big Bang is modelled on the British experience.
The Prime Minister, Ryutaro Hashimoto, last year identified six sectors for his 2800- point reform: administration, education, fiscal, social, financial and economic. This was announced when his liberal democrat government couldnt muster a majority (now it can, thanks to defections from other parties).
The flagship of reform is the promise to downsize government (from 22 ministries to 13) and to curb the power of the bureaucrats who have been more powerful in planning industrial expansion than the politicians. Now catching up has ended, such large numbers are not needed.
But Hashimoto has already recoiled from his promise to break up the all-powerful Ministry of Finance, which will continue to be responsible both for policymaking and drawing up the Budget.
The promise to streamline the ministries has not been accompanied by any downsizing, so the bureaucrats will live on including the 13000 or so in the once powerful Miti, the trade ministry, whose former resource allocation role will now give way to vaguer notions of rule and framework setting.
The vast, impenetrable distribution system (foreign businesss biggest gripe) will in theory be opened up to foreigners amid a bonfire of restrictive regulations. But in practice will it make a difference?
Isao Nakauchi, chair of Daiei, Japans biggest retail chain operator said: I myself do not think it will be successful, and explained some of the maze of regulations. These include limits on size, compulsory closing times, asking permission of local shops for some activities and approval from Miti. Some of the permissions, he said, were guided more by local customs than law and the ruling liberal democrats tended to pay more attention to the views of small retailers because of their votes. He added that the word deregulation in Japanese merely means moves towards relaxation.
The epicentre of Big Bang will be deregulation of the financial markets over five years. The overcrowded banking, securities and insurance sectors will be allowed to compete in each others backyards. It has a political as well as a financial dimension a response to the string of scandals in housing loans and the securities markets. The hope is to generate new financial products and to make Tokyo as efficient as New York or London by 2001.
Graham Harris, area director for Lloyds Bank, speaking in a personal capacity, pointed out that 30% of those working in the Japanese securities industries are employed by companies making regular year- on-year losses. Such companies, he said, would not exist if based in London or New York. He predicts that Big Bang will continue until it begins to cause unemployment and then the pace will slow.
The truest test of deregulation will be the rice market. Despite a recent easing of the ban on imports, Japan imports minimal amounts, preferring hugely subsidised domestic rice farmed in a grossly inefficient manner, when overseas rice could be imported more cheaply.
To open up the rice market would be the nearest thing to a free lunch that any economy could imagine. Rice would be imported from poorer developing contries, boosting their incomes, while Japanese consumers would pay less, freeing money to be spent on increased consumption.
This would free land used as uneconomic rice paddies for building desperately needed houses, which would cure the land shortage that has sent prices soaring.
When asked about this, most Japanese say that they happen to be fond of their own sticky rice, which is easily handled with chopsticks. And the ruling liberal democrats, dependent on the rural farming vote, are unlikely to force through liberalisation.
Therein lies the rub. The success of deregulation will depend on the political impetus behind it. The Hashimoto government started the reforms, much of which it borrowed from the opposition, with a rare energy when it depended for support on its coalition partners. Now it has a majority and isnt consulting its coalition partners over important issues.
This doesnt necessarily mean that Ryuzaburo Kaku, honorary chair of Canon (and an avowed Keynesian expansionist), was right when he told us: None of the six principles of Hashimotos government will be successful. But the onus now is on the government to prove its critics wrong and show that its appetite for reform is undiluted.