Japan caught in fiscal and economic mire

BANGKOK: The reams of economic data that we are bombarded with every day usually don't mean much to most of us, even the really big figures. That Japan's public debt is 130 percent of its gross domestic product suggests Tokyo has spent a lot of yen -- 645 trillion (Bt233.65 trillion) in fact -- trying to pull the economy out of its slump, but not much more.

Consider, though, that historically no country runs up that kind of debt unless it's on a war footing, and the depths of Japan's problems suddenly come into sharp focus.

On Thursday Japanese Finance Minister Kiichi Miyazawa did his best to ring some alarm bells, saying that the country's finances were "near a state of collapse".

Worried that he might have scared foreign investors with that kind of talk, he apologized the next day as only a Japanese government official can, claiming that he had "meant to say that Japan will face a hard time reforming its fiscal situation".

Miyazawa's correction reassured nobody.

Recent data confirm that Japan is caught in a fiscal and economic mire. Unemployment is at a record high, bank lending has shrunk for 38 consecutive months, prices continue falling, and the stock market has shed a third of its value in the last year and is now at its lowest level in almost 20 years. And then there is that massive national debt.

How did traditionally prudent Japan get in such a mess? Blame a creaky, unrepresentative political system that grants the rural areas too much influence and John Maynard Keynes, the British economist who argued that economic downturns are best fought with the injection of large amounts of public money to stimulate demand.

Blinkered by the belief the problem was only a cyclical one, successive Japanese governments have been fighting the country's worst post-war slump by pouring in trillions of yen to build the world's most expensive bridges, roads, and airports.

If the government just added enough fiscal stimulus, if the central bank just held interest rates low enough, a self- sustaining recovery would kick in, so the thinking went.

Yet it has all been to no avail, and it now appears the economy is contracting again, despite a fiscal stimulus cumulatively worth more than the entire economy of France over the last six years.

The real problem in Japan is not all that dissimilar to Thailand's: a soaring number of bad loans that have stubbornly refused to go away since the collapse of the bubble economy a decade ago.

In Japan, the lack of aggressive economic leadership that would force the banks to properly deal with their bad debt, coupled with pump-priming, has kept deadbeat companies in business. This has created a vicious cycle wherein banks don't write off the bad loans and healthy companies are hurt by the price-cutting of their weak rivals.

Japan's problems are deep-seated structural ones, which are impervious to fiscal stimulus or low interest rates. They can only be solved by a deep-reaching overhaul of the political and economic mechanisms. On the economic front, Japan is trying to do this, albeit at an excruciatingly slow pace. On the political front, though, little seems to change.

How the Japanese government reacts to the latest warnings of economic distress will have a big bearing on the world, and Thailand. Japan is the world's second biggest economy, accounting for 14.5 percent of the global economy.

And with the US economy slowing we are running out of international engines. A genuine crisis in Japan would be particularly painful for Thailand, which relies on Japan as a major market for its exports and as a big source of investment capital.

Japan's lost decade represents a cautionary tale for the Thaksin government, which has said it will do many of the things the Japanese have tried over the last 10 years: set up state- backed funds to deal with bad loans, help delinquent debtors, run a deficit budget and spend more state money on public works.

Crucially, the Thai Rak Thai-led government has also promised to help restructure the economy, boosting the role of small and medium-sized companies and upgrading the skills of the workforce. These are important measures that have potential.

But they will also be difficult to implement successfully. As Japan has shown, a fall-off in commitment to restructuring can be extremely costly.

-- The Nation/Asia News Network