Japan is stalled as it resists change
When the Federal Reserve cut a key interest rate by three-quarters of a point this week to bolster the U.S. economy, the Bank of Japan’s board of governors could only watch and wish it had room for that kind of aggressive action.
In Japan, the prime rate is just 0.5%. With borrowed money already nearly free, the central bank can hardly prime a stumbling economy -- the second-largest behind America’s -- with even cheaper cash.
So as the Nikkei stock index suffered its biggest two-day drop in 17 years this week and the minister for economic policy lamented statistics showing Japan no longer had a “first-class” economy, politicians and central bankers lined up to reiterate that the best course of action was to do nothing.
It was further proof that the “Japan is back” mantra of two years ago is dead. Disillusioned investors -- foreign and domestic -- are pulling money out of Japanese markets, which were among the world’s worst performers last year. While investors were reaping big gains in China and India last year, the Nikkei lost 11% of its value.
“A couple of years ago, there were lots of expectations of impending structural changes that were built into the foreign investment coming into Japan,” said Richard Jerram, a senior economist at Macquarie Securities in Tokyo. “But over the past two years, it has become clear that nobody in Japan really wanted it.”
The mood was different under Prime Minister Junichiro Koizumi, when the buzzword was reform and there was widespread anticipation that Japan was ready to start opening its insular economy.
Politicians talked of the need to boost investment from abroad, even if that meant foreign ownership of Japanese companies. The concept of shareholders’ rights was gaining a toehold. Small investors were rushing to stock markets.
The result was a turnaround from more than a decade of economic drift that followed the bursting of Japan’s bubble economy. Long-depressed real estate prices began to recover and the country went on a run of consistent, if not spectacular, growth.
But the appetite for change largely evaporated with Koizumi’s retirement in 2006. The rebound had created economic losers as well as winners, and public debate shifted from reform to finding ways to alleviate the income disparities that emerged. Koizumi’s successors sought to assuage some of the wounds opened by his confrontational approach. Their balm was to usher Japan’s traditional pork-barrel politics back into style.
Underlying the stock market malaise are wider worries about economic fundamentals. Japan’s global ranking for per capita wealth has declined for six years. Corporate profits have been higher, but that hasn’t translated into wage increases, and with prices rising in large part because of higher fuel costs, consumer spending remains flat. Surveys show workers and consumers were already gloomy about their prospects even before this week’s stock market plunge.
“There are several head winds suggesting personal consumption could weaken quite substantially, from weakening real estate to the rising value of the yen against the dollar that could hurt exports,” said Hiromichi Shirakawa, chief economist for Japan at Credit Suisse.
Shirakawa is among those who worry that the stock market fall reflects investor fears about the long-term profitability of Japanese companies, not just a short-term panic over the U.S. economic problems. “The country is aging, the population is not growing and we have no leading domestic industry to sustain the country,” he said.
Japan’s defenders point out that the business environment has improved since the dismal days of the 1990s. Bank balance sheets are in far better shape and have reported only a fraction of the sub-prime lending losses that hit other global institutions.
But the country seems to bore investors. It lacks the get-rich-quick prospects of China and India and even suffers by comparison with the investment-friendly, pro-growth agenda of the incoming conservative government in South Korea.
Instead, Japan seems to be turning inward. Many economists argue Japan must drastically increase immigration to make up for its shrinking workforce. But there is little sign that politicians or bureaucrats are prepared to loosen restrictive immigration policies. In fact, Foreign Minister Masahiko Komura speculated last week about plans to impose Japanese language proficiency requirements on long-term residents, a move that critics contend would impede the country’s ability to attract skilled foreign workers.
Among the general public, there is much discontent over perceived income inequality. Japan’s media are filled with stories of dying small towns and cities, and politicians from all parties are competing to top one another with spending projects, such as road building to appeal to these disaffected voters.
More worrisome, many observers say, is the apparent paralysis of the political class. Prime Minister Yasuo Fukuda responded to the stock market dive by declaring there is nothing Japan can do.
Economist Shirakawa says Japan needs more pressure from the outside world to change.
“The younger generation here is changing. They are much more prepared to see foreign capital buying Japanese companies, much more prepared to accept different working conditions,” he said. “The problem is that the old guys still have the power.”
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