By Les Jones, head of global markets at Old Mutual Asset Managers During his visit to Japan in m...
By Les Jones, head of global markets at Old Mutual Asset Managers
During his visit to Japan in mid-February, US president Bush exhibited the kind of plain speaking for which he is renowned. It was therefore unfortunate that the highlight of the trip was Bush's failure to differentiate between deflation and devaluation, although his words of praise for the Prime Minister will hopefully prove to be of greater historical significance.
Whether his description of Koizumi as a great reformer was borne out of misguided research, political flattery or a desire to embarrass the hitherto torpid Japanese premier into action remains unclear. What is more apparent is the magnitude of the task that Koizumi faces.
Japan's economy has been mired in recession for more than a decade, with its unwillingness to address its deeply entrenched structural problems resulting in the longest post-war economic decline anywhere in the industrialised world. Only now that wages are falling, unemployment is rising, the Nikkei is trading at slightly more than a quarter of its end-1989 record level and the bad loan burden has reached a new zenith have the country's problems become a major political issue.
Some economists have suggested that aggressive monetary easing will provide the best solution, calling for the central bank to expand the monetary base to manufacture inflation, given that it has already cut interest rates to close to zero to little effect.
Others have suggested attacking the problem from a fiscal standpoint, proposing a combination of taxation reform and increased public works spending. Naysayers have highlighted the problem with the latter as two-fold: first, the spending packages of the past decade had little impact and there is no reason to suggest that this time will be any different; and second, that public debt has escalated to levels whereby this is an impractical solution.
There is also little to suggest that extra spending can be a proxy for genuine reform. Others still have proposed a wholesale onslaught on the corporate sector, with the banks a likely starting point. Non-performing loans have now reached the crisis level of $270bn, a level at which we believe that something will have to give and that change will be inevitable.
The most likely scenario is one of a combination of these factors. Koizumi has spoken publicly of structural reform, but his lack of a clear definition of the term has meant that the general public has bought into the idea despite (or perhaps because of) their lack of a full understanding of what it really means. However, Koizumi faces greater resistance from the Liberal Democratic Party.
The unwillingness of the LDP to embrace change appeared to be breaking down with the appointment of the reformist Koizumi as leader, although the paradox of the situation is that his appointment merely reinforces the strong position of the self-same old guard. Koizumi's future is therefore by no means certain.
However, with the full support of the US, it is to be hoped that he will have the confidence to implement the kind of reforms which history will prove to have been more fundamental than superficial.
Reforms have full backing of US.
Bad loans now at crisis level.
Reformist PM should result in improvement.
Economy caught in decade long recession.
PM faces political resistance to reforms.
Lack of clear reform programme.
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