Japan Needs a Jolt to Force It to Act Decisively on Economy


A jaundiced view gaining favor in some Japanese quarters holds that the biggest threat to this nation’s long-term economic health isn’t so much that it will suffer a financial crisis before the end of March, but that it won’t.

Japan is so paralyzed and in need of a push, some now argue, that the only way it will be forced to act decisively, break its policy logjam and address its enormous bad debt problem is for it to weather a seismic jolt.

“In sharp contrast to Americans, Japanese don’t mind suffering as long as everyone is in it together,” said Atsuo Mihara, an independent economic critic. “We can’t seem to react to a crisis until it’s right in front of us. It’s part of our DNA.”

The latest blow to Japan’s battered prestige came this week when U.S. rating service Moody’s said it was considering a two-notch downgrade of Japanese government debt that would put the world’s second-largest economy on par with Poland, Latvia and South Africa.

There are growing concerns overseas and at the highest reaches of the Bush administration in advance of next week’s summit in Tokyo that Japan’s financial picture could get very ugly between now and March 31--the end of the fiscal year, when Japanese firms and banks close their accounts.


But the view from Tokyo is that the nation once again will muddle through.

One major reason, as seen by Moody’s announcement, is that Japan’s approach, wealth, structure, regulations and the government’s willingness to spend huge sums on stopgaps seriously blunt the effect of global market pressure.

In Moody’s case, for example, only 5% of Japanese government bonds are held by foreigners. The rest are held by domestic institutions that don’t worry much about what Moody’s thinks, even as they succumb to government pressure not to sell. Another worrisome blob on Japan’s radar screen is low stock prices. Japanese banks and companies have traditionally held large stakes among themselves, so a tanking market leading up to March 31 settlements is a potentially huge problem for banks hoping to preserve their capital.

That said, the benchmark Nikkei average is 6% higher than the last book closing in late September, with the market opening Friday slightly lower.

Furthermore, Japan has announced a $15-billion fund to buy depressed stocks from banks and hold them for several years, which analysts believe helps explain the market’s recent rise.

Once again, critics charge, Japan has opted to mask its problems with a short-term fix rather than listening to market signals that entire industries should be overhauled.

Granted, parts of Japan are changing rapidly, particularly in the private sector. And there’s still a huge perception gap as many Japanese feel battered by rapid economic transformation even as foreigners see torpor.

Still, a government led by the ruling Liberal Democratic Party for the last half a century and long beholden to inefficient farmers, construction companies and retailers has displayed a dogged resistance to fundamental change.

A package of anti-deflationary measures released Thursday is seen as little more than a show of good intent in advance of President Bush’s Sunday arrival.

Japan also has been helped in dodging incoming bullets by the enormous capital surplus it’s amassed through decades of trade surpluses as consumers around the world stocked up on Japanese televisions, cars and DVD players.

A recent look at financial meltdowns from Argentina and Thailand to Mexico, South Korea and Brazil by HSBC Securities found that Japan lacked the common ingredients seen in free-fall cases elsewhere, namely high foreign debt, limited overseas assets and high inflation.

Japan still has the world’s largest current account surplus and some of the worst deflation in modern times.

Japan also may benefit from early signs the U.S. could bounce back relatively soon. Some Japanese exporters are seeing early improvement even as domestic inventory levels are pared back.

Although this won’t guarantee much real growth, analysts say, it could dampen the slide as Japan weathers its third, and most protracted, recession in a decade.

Another blow that could upend the Fuji apple cart would be a few corporate failures in rapid succession or a toppling of a major life insurer. Also leading to fears of a March meltdown is the risk of bank failures, leading depositors to make a run on weaker institutions and spread panic.

There’s no doubt Japan is pushing its luck as its financial health deteriorates, and its increasingly wobbly condition leaves it more vulnerable to a blow from a direction it hasn’t anticipated.

The amount of bad debt held by banks--which the government pegs at $138 billion and private investment firms say is four times that amount--is far worse than the U.S. savings and loan crisis at its nadir and is piling up faster in a deflationary environment than it can be written off.

Still, Japan has displayed an uncanny ability to scrape through one close call after another over the last “lost decade.”

The question is at what cost. The last decade has seen Japan spend $100 trillion in real estate and investment wealth as government and private debt loads now threaten to weigh down its people for generations.