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.