With a succession of prime ministers having proved incapable of ending Japan's economic slump, the OECD suggests it is time for some major structural reform
Watching his bank's stock price fall to record lows, Yoshifumi Nishikawa could not help but point the finger at Japan's government.
'The market is in an uncertain state because the content of the bank reform plan is unclear,' explained the president of Sumitomo Mitsui Banking, one of Japan's top four banks, the very ones fighting to avoid being nationalised.
It is not that simple, of course. Nishikawa blames Tokyo's confusion over how to fix the banking system for his stock dive; the government blames him and his peers at Mizuho Holdings, Mitsubishi Tokyo Financial Group and UFJ Holdings for the nation's woes. All this finger pointing gets to the heart of Japan's real problem: denial. Tokyo refuses to admit how bad things are and its own hand in things, and ditto for Corporate Japan.
No matter how bright policymakers or executives are, their jobs seem to entail looking the other way as crises mount.
For nearly 13 years, this approach has worked. Financial troubles have come and gone, and so has a dizzying succession of prime ministers who took their turns denying the magnitude of Japan's woes. Right now, it is Junichiro Koizumi's turn to talk about change that will not happen and deny how bad things are.
The Paris-based Organisation for Economic Co-operation (OECD) has urged Japan once and for all to admit defeat and move on. What does it suggest? 'A major change in the way the economy has operated since the early 1970s.'
That is the conclusion of the OECD's 165-page analysis of where Japan has been and where the world's second-biggest economy is headed.
'Those opposing reform,' the OECD says, 'must realise there is no alternative to revitalising the economy through structural reform and that there is no more time to be wasted.'
Tokyo will no doubt dismiss the report as yet another example of gaiatsu, or foreign interference in its domestic affairs. Yet another foreign operation with a bit more influence over Japan's economy, Fitch Ratings, lodged its own no-confidence vote. Fitch cut Japan's long-term local-currency credit rating one level to a fourth-ranking AA minus.
'The downgrade reflects the continuing deterioration in Japan's public finances,' said Fitch, which last cut Japan's rating in November 2001. 'Japan's ratings will remain under downward pressure.'
No one is downplaying the seriousness of the task before Japanese officials. They are dealing with what might be considered a perfect financial storm, a dysfunctional banking system, widespread balance sheet problems, entrenched deflation, zero short-term interest rates and a political establishment that will not accept failure and change its ways.
Admitting defeat is not something Japan does well. A dozen years ago, its post-World War II boom was the envy of the world. Others sought to emulate Japan's economic model, based on active government planning and close links among politicians, companies and financial institutions.
In the late 1980s, the Japanese seemed poised to dominate the global economy. Globalisation changed all that. Japan never had much use for competition, certainly not from abroad. Keeping out imports, or taxing them beyond affordability, is how it kept the whole enterprise together. That way, companies, no matter how monopolistic or inefficient, could employ the masses. Unemployment stayed manageable and Japan remained in business.
As the 1990s unfolded, the World Trade Organisation became more powerful and nations realised the importance of attracting investment. Japan found it harder to maintain the status quo. Then denial set in as rarely before and Tokyo set out to protect a business model that served it so well over the decades.
The effort started out small, with a few construction projects here and there to boost growth and create jobs. Tokyo began issuing more and more government bonds to fund public works projects. For the better part of the 1990s, economic stimulus from moving mountains, damming rivers, paving rice paddies and reclaiming land from the sea helped Japan avoid changing.
So did directing banks to support deadbeat companies. In trying to save the economy from ruin, the government and banks sheltered zombie companies from failure. Tokyo is still doing this.
Even if Japan refuses the change, the world is changing around it. Tokyo has amassed a debt-to-gross-domestic-product ratio approaching 140%, prompting ratings companies to downgrade its credit. Worried about the outlook for banks, companies and, indeed, entire industries, investors are avoiding Japanese stocks.
That explains why Japan is left with 'managing a transition from a system that once worked well but is now ill-adapted to a changing environment,' as the OECD said.
Whether Japan will take the advice, accept failure and go back to the drawing board is anyone's guess. There are few hints Tokyo is ready to do that. That explains why the Nikkei 225 Stock Average is near two-decade lows and likely to slide more. The denial continues.
Bloomberg newsroom, New York
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