Japan’s Rx: Corporate Overhaul

The Japanese economy is slumping again despite massive injections of government funds. But the shadow of recession can be turned back by continued corporate restructuring. The government should encourage this corporate reform through such measures as new tax laws because it offers a better prospect for sustained growth than repeated priming of the economic pump.

After two quarters of increased gross domestic product, the economy posted a sharp drop in the third quarter. This came on the heels of Tokyo’s announcement three weeks ago that it had put together a $171-billion economic stimulus package, its ninth since 1991.

Last year’s infusion of more than $300 billion into the economy worked, underpinning much of the GDP growth in the first half of this year, but the long-term price has been high. In financing extravagant and often ill-conceived public projects, like building unneeded airport runways or installing color-coded pavement in Tokyo, the government is piling up a debt that now exceeds Japan’s annual GDP, making the country the most indebted in the industrialized world. Moreover, there are few signs that the public stimulus is boosting private spending, which is the government’s goal.

Yet there are reasons for optimism amid the gloom. Japan’s banks are in better shape than they were a year ago, and corporate restructuring, although slow to start, is underway despite the distaste in Prime Minister Keizo Obuchi’s government for “American-style layoffs.” Cheered by investors on the Tokyo stock exchange, which has staged impressive gains this year, companies like Nissan, Mitsubishi, NEC, Hitachi and Sony are announcing needed plant closings and say they will cut thousands of jobs in an effort to improve productivity.

The time has come for Obuchi to stop treating Japan’s economy like a junkie, in need of taxpayer fixes to keep from collapsing. These infusions will not cure Japan’s economic malaise or ease the pain of restructuring, shedding excess capacity and slimming payrolls. Moving promptly on proposed changes in corporate taxes to promote restructuring is the therapy that Japan needs.