NEWS ANALYSIS : Exit Hosokawa, Cue Bureaucrats : Japan’s Economy Likely to Improve, but Not Trade Relations

While it provoked a brief--and quickly reversed--plunge on the Tokyo stock market Friday, Prime Minister Morihiro Hosokawa’s plan to resign is widely viewed as unlikely to hurt Japan’s struggling economy and might even help, many analysts said.

Hosokawa’s resignation is expected to end a political deadlock, increasing chances that a budget will be passed and that economic stimulus measures can take effect. Japan’s recession--its worst in the postwar era--is widely expected to end this year, thanks in part to growing exports to an expanding U.S. economy.

Longer term, however, there are serious questions about whether Japan will undertake substantial economic and political reforms no matter who succeeds Hosokawa. Without such change, trade relations could worsen with the United States and the rest of the world.

Still, assuming that there is a smooth transition to someone within the ruling coalition, such as Foreign Minister Tsutomu Hata, Hosokawa’s departure is “not necessarily bad news for the economy and stock market,” said Kathy Matsui, a strategist at Goldman Sachs (Japan) Corp. “Our economist is saying it’s actually quite good news that Hosokawa is out.”

At Nomura Securities in New York, Anne Zachara, vice president in charge of Japanese equities, concurred, noting that Hosokawa’s government was a reform coalition dedicated to economic stimulus through income tax cuts and public spending as well as some initial steps to open Japan’s markets to foreign competition. “Those policies are all in place and unlikely to change,” she said.

The most immediate effect of Hosokawa’s departure may be passage of the government’s budget. The opposition Liberal Democratic Party has blocked passage of a national budget for the current fiscal year, which began April 1, to press its demand that Hosokawa respond to allegations of financial improprieties in the 1980s.

Most observers now expect the Liberal Democrats to drop their opposition to passage of a budget, which in turn could make available funds for public works projects.

“They got his head,” Jeffrey Young, an economic analyst at Salomon Bros. Asia Ltd., said in referring to the Liberal Democrats’ role in forcing Hosokawa from office. “They can’t ask for too much.”

“To the extent that Hosokawa was unable to push through a fiscal stimulus package because of political opposition, his departure will help Japan deal with its slow economy,” said Richard Drobnick, head of an international business program at USC.

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Japan’s economy has endured its worst postwar recession during the last three years, and its major banks are still saddled with an estimated $250 billion in bad loans left over from the giddy 1980s when real estate and Tokyo stock prices soared in tandem.

During the recession, Japan’s companies have begun to restructure, although not as dramatically as their U.S. counterparts. Major layoffs have not hit the big companies.

Still, banks have been writing down some loans. And the belief has been growing in recent weeks that the recession is near an end. Bank of Japan Governor Yasushi Mieno, who has a reputation as a conservative forecaster, said this week that “the economy is brighter.”

“Inventory adjustments and corporate restructuring programs have progressed steadily,” Mieno said. “Exports are recovering due to brighter overseas economies led by the United States.”

But that very reliance on exports to the United States indicates that long running imbalances in Japan’s economy have not been dealt with and could cause problems.

Hosokawa’s departure is likely to increase trade tensions, Japan experts said, because it will leave policy controls in the hands of powerful government ministries that are opposed to a real opening of Japan’s markets.

The outgoing prime minister had been trying to fundamentally change Japan’s economy by reducing the power of the Ministries of Finance and of International Trade and Industry. But he faced determined opposition and his resignation will leave “bureaucratic government in power indefinitely,” said Chalmers Johnson, professor emeritus at UC San Diego.

The Finance Ministry had already trimmed the size of a Hosokawa tax cut. Its foot dragging on economic reform could aggravate tensions with the United States.

In that respect, it would be better if the ruling coalition selects Hata, the apparent front-runner, to be the next prime minister. Hata “is perceived as serious about reform, he’s got a better domestic base and the U.S. has a lot of confidence in him,” Young of Salomon Bros. said.

Another possibility is that both the ruling coalition and the opposition Liberal Democrats would split and that Michio Watanabe, leader of a Liberal Democrat faction, would be the next prime minister. Hata and Watanabe, both former finance ministers, are well-respected economic policy-makers, said Kenji Mizutani, vice president of Tokai Research & Consulting.

Under Hata, “there should be a continuation of policies,” while Watanabe “may change some of the nuances,” said Kunio Miyamoto, chief economist at Sumitomo Life Research Institute. “But I don’t think we have a viable alternative to further deregulating our economy and further expanding domestic demand. So the substance shouldn’t be very different.”

Mizutani added, however, that the overall political situation is likely to remain unstable at least until there is a new election that produces a clear winner. With so many political parties and factions competing against each other, political uncertainty could continue for a year or two, he said. During this period, “businessmen will not expect much” in the way of decisive economic policies, he said.

Holley reported from Tokyo and Flanigan from Los Angeles.

A Troubled Economy...

Japan has been mired in its worst recession in the postwar era, due in part to slowed consumer spending and sluggish demand abroad for Japanese goods. Political troubles of now-resigning Prime Minister Morihiro Hosokawa have not helped matters.

Japan’s gross domestic product, quarterly in billions of U.S. dollars: $1,757.63

Despite the recession and Hosokawa’s political troubles, the Japanese stock market has rallied from its lows of last November. The comeback is partly just a buying response from bargain hunters, but there also has been optimism that an economic stimulus package would help pull the economy out of recession.

The Nikkei index, weekly closes except latest: Friday: 19,934.99, up 44.01

Sources: WEFA Group; Bloomberg Business News