Japan's economic lesson

The Korea Herald Asia News Network Seoul

Korea was liberated from Japan in 1945, but Seoul has never been free from the economic influence of Tokyo. The nation attained economic growth and industrialization, often by buying, begging and borrowing key equipment and technology from its former colonizer and sold end products to the latter. Now, its economic mentor and development model is in serious trouble. And this might force the two economic partners and competitors to exchange their roles.

Recently, the Japanese Cabinet approved a plan which calls for injecting fresh funds into its banking sector to prevent a financial crisis. The plan also urges major banks to speed up the disposal of bad debts by restructuring ailing corporate borrowers, either through survival plans that the market can accept or legal measures such as bankruptcy procedures. These are exactly what Seoul did to get out of the currency turmoil that hit Asia in 1997-1998.

Japan's ruling Liberal Democratic Party separately recommended measures to combat deflation, which calls on a government agency to buy 2 trillion won worth of banks' nonperforming loans by March 2003 even at taxpayers' expense. Such moves by Tokyo reflect the seriousness of debt-deflation crisis gripping that country doggedly for much of the "lost decade." Lacking key elements of fiscal mobilization and tax reform details, however, their effect will likely be limited.

Indicating the problems facing the world's second largest economy, Japan has $3 trillion in public and household debts, six times its GDP. Tokyo's wholesale prices have kept falling for the past four years, or eight by some estimation. In a country of "company men" and lifetime employment, the jobless rate is approaching 6 percent. The benchmark Nikkei Stock Average fell below the Dow Jones industrial for the first time in 45 years.

Local press warn of a looming crisis in March but chances appear slim, given Tokyo's resolve to head it off by all means. Similar cries of wolf last May, September and this February proved groundless. If Japan keeps delaying vital reforms, however, it will slowly and steadily degenerate into a third-rate economy, if not implode suddenly. The economists compare Japan's economy not to acute stomach cancer but to a chronic but malignant ulcer.

How has the world's manufacturing powerhouse with the second deepest pockets of foreign exchange has been turned into a global time bomb as Forbes magazine put it? Where are the economic gurus, who preached the need for learning from Japan? Tokyo has only itself to blame for the current reversal of status. More than a decade has passed since Japan's real property bubbles went bust but its financial industry still awaits repairs.

As elsewhere, the problem lies with the country's political leadership. People tend to agree on reforms but evade them when it comes time to endure accompanying pains. Far from inducing and encouraging the public to swallow the bitter pills, the Japanese politicians took the lead in thwarting Prime Minister Junichiro Koizumi's reform efforts. Former Foreign Minister Makiko Tanaka even billed the premier himself as a "stumbling block" to changes for the better.

Nor does the rest of the world appear to be holding their breath to see Japan's financial and industrial reform anytime soon. Even tough-talking U.S. President George W. Bush had to deliver his call for Japan's early economic reform at private meetings in Tokyo last week, apparently conscious of backlash from reform-shy Japanese. But any economic turbulence there will nip the budding U.S. recovery, pulling down the global economy along with it.

One of the countries hit hardest will be Korea, which still ships 10 percent of its exports to the neighboring economic giant. The freefall of the Japanese yen, endorsed by Washington to some extent, will sharply erode the price competitiveness of made-in-Korea goods against their Japanese counterparts in third countries, too. Despite signs of recovery, the nation's economy is always vulnerable to outside influence, such as foreign exchange fluctuations and declining demand.

The Seoul government also should prepare for another possible adverse effect of worsening trouble in Tokyo -- the sudden retrieval of some $4.5 billion in its lending to Korea. The Japanese were quickest in withdrawing their capital at the first signs of the currency problem here five years ago. In view of these and other inauspicious factors still haunting the nation's economy, we heartily welcome yesterday's settlement of strikes by unionized rail workers.