Japan: A Setting Sun?

Aurelia George Mulgan

From Foreign Affairs, July/August 2000

Article preview: first 500 of 4,267 words total.

Summary:  The Asian financial crisis had a side benefit: prodding the Japanese government to fix its economy. But as the sense of urgency eased, so too did the momentum for change. The Liberal Democratic Party, never a true champion of reform, now blocks deregulation from every angle. Wasteful public spending has created little but debt. And the public's trust in its government is all but gone. Recovery would require Japan's politicians to give up the many benefits of the status quo, which they will not do without a fight. So Japan's reforms are stalled permanently. Its economy is, too.

Aurelia George Mulgan is Professor of Japanese politics at the Australian Defence Force Academy of the University of New South Wales and author of The Politics of Agriculture in Japan.

DEATH IN MIDSUMMER

Two years ago, with an economy mired in recession and reeling from a full-blown financial crisis, Japan's elites realized that something had to give. They embraced a complete overhaul of the country's banking system and acknowledged the need for structural reform of the economy as a whole. Reform peaked in 1998, when Tokyo moved to rescue the financial system from imminent collapse, cut regulations, and revitalize industry.

Today Japan's recovery hangs in the balance. Just when the momentum for reform appeared unstoppable, the government's revival strategy began to lean too heavily on fiscal stimuli, pushing Japan into a spending rut. Economic growth will halt if Tokyo ignores the pressing need for reform. The government is backpedaling because the sense of urgency generated by the banking crisis has eased, because the economy is showing some signs of recovery, and because the upcoming general election is looming large in the minds of ruling Liberal Democratic Party (LDP) politicians. But the underlying problems remain, and shallow political opportunism is derailing reforms vital to Japan's future economic recovery.

JAPAN, INC.

By slowing reform, Japan risks losing whatever economic momentum it has recently achieved. Self-sustained growth seems frustratingly elusive. Vital indicators of economic health, such as personal consumption and business investment, remain weak. The decline in capital spending appears to have leveled off, but consumer spending continues to shrink. High-profile corporate failures are still causing mass layoffs. Many companies are trimming wages, bonuses, and work forces. Unemployment has reached unprecedented highs, according to records dating back to the early 1950s -- hardly a boost to consumer confidence. And consumer spending is unlikely to revive until the job outlook improves.

The only big spender in Japan today is the government, which launched nine mammoth stimulus packages, totaling $1.2 trillion, between 1992 and 1999. The country's very modest return to growth in the first half of 1999 was fueled almost entirely by state largesse. Aggregate demand rose directly in line with increases in public-works spending. But when the effects of the pump-priming wore off in the third quarter of 1999, Japan slipped back into the recession that has plagued the country since 1993.

Japan's inflated budgets present another obstacle to economic recovery. Consumers and taxpayers fear that ultimately they, their children, and their grandchildren will have to finance the government's profligacy. Japan's aging society will severely strain social-welfare services and pensions, and many employees doubt whether they will ever see their promised benefits.

Furthermore, public confidence in Japan's government has been shattered. The bureaucracy's policy failures during the banking and economic crises cost it both credibility and trust. The bureaucracy's reputation was further tarnished by the various corruption scandals involving elite officials. As Japanese ministries try to halt the devolution of their powers to businesses and consumers by mounting a last-ditch defense against deregulation, the Japanese public grows increasingly frustrated.

On top of these bureaucratic failings is the chronic inability of Japanese politicians to come up with tough solutions when they are most ...

End of preview: first 500 of 4,267 words total.