Tokyo Must Not Dither
Japan has been in denial about the severity of its economic problems, but the rest of the world has its eyes open. News that Japan is officially in a recession has battered world markets and sent the yen plummeting. The sharp reaction should finally awaken Japan to the need for tougher measures to revive its moribund economy. The world’s second-largest economy has obligations in a global marketplace.
Tokyo could be the engine for Asia’s comeback. Instead, Japan is poised to be the domino that triggers another crippling round of currency devaluations among its Asian neighbors. Japan will be tempted to try to export its way out of its problems, but that strategy will do nothing to address the systemic structural problems in banking, financial services and other economic sectors.
A flood of cheaper Japanese exports would pressure other Asian countries to devalue their currencies to make their exports competitive, even as Beijing struggles to keep its promise not to devalue the yuan. American goods would face tougher competition all around.
The longer Tokyo waits to take on its structural problems, the more vulnerable it becomes to the shrinking confidence of the global marketplace. The news Friday that Japan’s economy fell at a shocking annual rate of 5.3% in the quarter ended March 31 has already sent foreign and Japanese investments fleeing.
Sadly, Tokyo has taken on its problems haphazardly. After the bubble economy collapsed in 1991, the government largely coddled insolvent banks saddled with hundreds of billions of dollars of bad loans. It began real banking reform but then backed off. Banks, meanwhile, have been reluctant to lend, especially to small and medium-size businesses, so bankruptcies are at record highs. So are unemployment, divorces and suicides.
No wonder consumers are reluctant to spend. Last year’s foolish hike in the national sales tax, though since rescinded, also dampened spending. Money pumped into public works programs has failed to stimulate the economy, especially in the absence of reforms. Even now, Japanese politicians, including Prime Minister Ryutaro Hashimoto, seem more preoccupied with next month’s parliamentary election than the economy.
A new stimulus package is in the works, but world markets are waiting for comprehensive reform. If Tokyo dithers until change is forced upon it, the damage to its insular and protected economy will be far greater than if it summoned the political will to act now.
