Japan enhances Asian crisis

Japan enhances Asian crisis

In the second of several articles on Japan's role vis-a-vis
the ongoing crisis in Southeast and East Asian economies, our
Asia correspondent Harvey Stockwin examines why many have failed
to focus on that Japanese role in the recent past -- and some of
the reasons why foreigners and Japanese alike are now making up
for lost time.

HONG KONG (JP): Finally though belatedly Japan is finding its
true position -- right at the heart of the ongoing Southeast
Asian and East Asian financial crisis.

The fact that Japan has not been clearly seen to occupy this
position much earlier is a story in itself. Certainly, since the
regional crises hit home in mid-1997, and for the preceding years
since 1990 when the Japanese economy was in the doldrums, like
their counterparts elsewhere in Asia Japanese politicians have
been fiddling while their economy burned.

Other Asian nations were too preoccupied with their own
problems to see clearly that they, too, were being burned by
Japanese failures.

Japanese politicians, as ever, were overwhelmingly preoccupied
with factional nuances rather than policy failures. Hopes for
political reform within Japan leading to much needed economic
change rose steeply in 1993-1994 but have declined as steeply in
the last two years.

The Japanese press was, as ever, reluctant to resort to
forceful criticism of the direction in which the country was
being taken by the politicians.

The media, and the nation, have been (and still are)
preoccupied with scandal, bankruptcies and suicides -- the
symptoms of failure, not the failure itself.

Another symptom of economic and political failure has been
once again hailed as a sign of economic success. For the last ten
months or more, Japan has been running huge, and ever higher,
trade surpluses which, in turn, help send its foreign exchange
reserves into the stratosphere.

But those reserves, at some US$230 billion, larger by far than
those of any other nation, do not have the normal effect of
strengthening the currency.

To the contrary, and as another sign of poor Japanese economic
health, while the surpluses have risen, the yen has declined. As
the Japanese surpluses rose, too, trade with Southeast Asian
countries, which were desperate to export their way out of
trouble, has actually declined, instead of rising.

The Clinton Administration, basking in the glow of a
successful U.S. economy, and, in any case, preoccupied with
sexual matters, refrained from chiding Japan as much as it should
have done. So there was a dearth of the much-needed gaiatsu
(foreign pressure) to provide from without the sense of
direction that was lacking within.

When the U.S. did finally bestir itself and pressured Japan to
take remedial action, the Hashimoto Administration cleverly tried
to negate further pressure (the Japanese are always good at that)
by solemnly promising that the government would take necessary
action to avoid starting a global recession.

Such action has not yet been taken.

Meanwhile, to those willing to listen, Japanese bureaucrats
were busy insisting, as they so often do when faced with
unpalatable criticism, that the foreigners did not really
understand, everything was going well and others -- the usual
anodyne reflexes of powerful men who have long since
forgotten how to look harsh reality firmly in the face.

The only Japanese response to the growing crisis was to
dribble forth an ever increasing number of economic packages
which were supposed to reinvigorate the economy but which, not
surprisingly, did no such thing.

One foreign economic analyst unwittingly put his finger on the
problem when he said of one package -- "there's nothing concrete
in it".

It was the double entendre of the decade. In fact, there was
literally too much concrete in most of the "rescue" packages.

For years, Japanese politicians and their bureaucratic masters
have kept the construction companies sweet with public works
programs which usually succeed in laying ever greater quantities
of concrete all over the face of Japan.

The companies made profits, the politicians took pay-offs. The
GNP statistics looked good, or used to, but the prospects for
real economic advance benefited hardly at all.

Above all other factors, had the Hashimoto Administration
taken sensible -- but, for the Japanese, radical -- steps to
boost investor and consumer confidence, and consumer demand,
Japan could have become, quickly and smoothly, a key part of the
solution to Southeast Asian and East Asian economic woes.

Seeing the problem in this perspective, and adopting any such
solution went against the Japanese grain for two vital reasons.
One of the key tenets of unending Japanese feudalism is that
government must place the interests at those at the top of the
economic hierarchy (construction companies) way ahead of those at
the bottom (ordinary consumers). So it has been at this
critical juncture, too.

Secondly, once those at the top of the political hierarchy
finally reach a policy consensus, they are usually extremely
reluctant to change it. The Hashimoto Administration reached a
consensus long ago that reduction of the budget deficits must be
the first priority. They have stuck to it, despite and because of
foreign pressure to the contrary, and regardless of the increased
risk of global deflation from continued pursuit of such a policy.

The best example of this came last year when goods and
services in the overpriced Japanese marketplace were subjected to
a further stiff increase in the Japanese consumption tax.

Given this tax increase alone, it has hardly been surprising
that there have been slim pickings for Southeast Asian exporters,
anxious to increase their sales to Japan.

Similarly, a recent Bank of Japan report itemized surprisingly
sharp declines, right across the board, in Japanese business and
consumer confidence.

So when, on April 3, Moody's Ratings Agency modified the
outlook for certain aspects of Japan's financial health from
"stable" to "negative", the agency said that the change "reflects
uncertainty about the ability of the (Japanese) authorities to
achieve a consensus that would help promote a return to economic
growth and fiscal balance".

Pointing delicately to the questionable financial health of
Japanese banks, Moody's suggested that "continued weakness in
domestic economic activity, and emerging deflationary pressures,
will likely further aggravate long-standing structural weakness
in the financial sector".

The Moody's modification shocked and depressed the markets --
but that in a way was the least of Japan's growing troubles.

Perhaps the most critical was the fact that the government
failed in its aim of getting the Nikkei Stock Market Index up
18,000 by the end of trading on March 31, the end of the
financial year in Japan. Despite considerable spending by the
government, the stock index still ended the year below 17,000.

Had the target of 18,000 been met, Japan's wobbly banks would
have valued their stock holdings at that level, making their
assets look stronger than they actually are. As the Nikkei closed
on April 3rd at 15,518, both the government's credibility, and
the banking sector's viability, looked shakier than ever.

Turmoil in the currency markets matched that in the stock
markets as the Japanese yen sank to a six year low of over 135 to
the U.S. dollar thereby further complicating the recovery of
Southeast Asian currencies from their recent steep slide.

Amidst all the bad news, the April 1 initiation of Japan's
"Big Bang" --the financial deregulation which aims to make Tokyo
a financial center on a par with New York and the City of London
-- almost got lost to view.

At a time when an overabundance of Japanese economic
regulations were guiding the nation towards recession, hopeful
thoughts of a radical reduction of regulatory zeal by the
bureaucrats seemed rather pointless.

But the most startling -- and yet at the same time hopeful --
development came as several leading Japanese businessmen have
spoken out trenchantly, warning of global disaster ahead unless
policies were changed. This was even more important than
President Bill Clinton carefully going public with his April 3
warning against Japanese bureaucrats pursuing out-of-date
policies.

The outspoken businessmen ostensibly seek the same massive
tax-cut and boost to demand that the Americans maintain is
essential. Even more important, their dissent signaled to those
Japanese officials and politicians justifying the status quo that
the old "iron triangle" of business-political-bureaucratic
collusion should no longer be taken for granted.

So there is some hope for change, within Japan, before it is
too late. The fact remains that, this recent week, Japan
solidified its status as a critical part of the regional and
global problem -- rather than being, as everyone once hoped, the
solution.