Japan Counts on Reform to Make Rebound Real
In his three decades running the Japanese operations of Louis Vuitton, Kyojiro Hata has seen the peaks and valleys of Japan’s economy. For the last 15 years, it’s been all valley.
The collapse of the Japanese bubble economy of the 1980s was not so much a bang as a long hiss that saw the air go out of real estate prices and consumer spending, with a dearth of new investment that even interest-free money couldn’t cure.
Hata acknowledges that he is no economist, but his long career with Louis Vuitton in Japan -- the French luxury brand’s largest market -- suggests an intuitive understanding of the local consumer, and he is now among the legion of observers who claim that the long-awaited Japanese turnaround is underway at last.
“It’s coming back, definitely,” he said as he prepared to launch a line of designer sunglasses at the flagship store on Omotesando, Tokyo’s boulevard of brands.
Hata and a growing chorus of optimists like him have some measurable evidence on their side. Corporate profits are up; unemployment is down. Land prices in the big cities are inching higher again. And the stock market is booming -- the Nikkei index has nearly doubled in the last three years and reached a five-year high Friday, putting smiles on the faces of equities traders as bonus time approaches.
The stock market has been fueled in part by a banking sector that is almost clear of bad debts. Plus, investors see that the public sector is trying to shuck off its bad habits, particularly the cozy conspiracy among politicians, bureaucrats and industry to funnel public money to inefficient but politically expedient businesses.
Talk of a rebound has been heard before, of course. Economic indicators ticked up in the late 1990s, before Japan fell back, hard, into recession. But confidence that this recovery is the real deal stems largely from belief in the liberalizing economic reforms of Prime Minister Junichiro Koizumi.
In September, Koizumi won an election that he called before it was necessary, running an aggressive campaign built around the cry of “kaikaku” -- reform. The election was ostensibly Koizumi’s way of shoving aside opponents to his privatization plans for Japan Post. The post office holds $3 trillion in savings and insurance assets that has long been a source of wasteful spending by profligate bureaucrats and politicians who oiled their local electorates with cash, roads and airports.
The campaign was also a proxy battle for a wider array of reforms, and Koizumi has interpreted his victory as a mandate to remake the Japanese economy and help cure its addiction to wasteful public spending.
“He’s considered a strange guy by the old-fashioned, conservative types,” Hata says. “But only a strange guy could do what he did.”
Koizumi, carrying the momentum of his win into what he says will be his final year in office, swiftly passed the postal privatization bills and appointed a Cabinet led by the most-heavily inclined reformers. Koizumi’s government has suggested it will slash the public payroll by half in the next decade, as well as use special tax revenue that now build too many roads and bridges, to offset budget deficits instead.
Koizumi’s largest undertaking may be consolidating eight state-controlled banks set up in the post-World War II era to lend money on favorable terms to sectors such as small business, fisheries, forestry and agriculture. Those groups have been, until now at least, the electoral backbone of the ruling Liberal Democratic Party, putting Koizumi in the position of challenging a sacred back-scratching relationship that has sustained his party’s nearly unbroken 50-year hold on power.
Talk of reform is everywhere in Koizumi’s Japan these days. Government panels propose revising the ancient covenants that prevent a woman from ascending the emperor’s throne. Even tradition-bound Japanese professional baseball has called 2005 its year of reform, taking hesitant steps to emerge from years of paralysis and declining attendance.
It is hard to quarrel with the claim that Japan is back -- psychologically, at least.
“No one makes negative comments about the Japanese economy anymore,” says Kimiyoshi Tsukasaki, an economist with the Japan Center for International Finance in Tokyo. “More and more people say they see a bright side now. A big rebound is coming.”
Whether the perception of recovery translates into a real one is the big question. Critics point to enduring structural problems that threaten long-term growth: an aging population that has already begun to shrink and may not have the wealth to pay pensions to baby boomers now on the cusp of retirement and an inevitable rise in interest rates that will increase the cost of servicing a gross public debt that has risen to 160% of the GDP.
“Koizumi kept roaring ‘reform, reform,’ but he is playing a hoax,” says Masaru Kaneko, an economics professor at Keio University. “People have this image that Koizumi can reform Japan, but in fact he has created huge debts.
“Voices among economists and the media are exaggerating the real state of the Japanese economy because they want to restart the bubble economy.”
Some critics also question the sustainability of a recovery that is dependent in large part on a continuation of the boom in China.
And with its massive stores of cheap labor, China will probably continue to be a powerful deflator of Japanese wages and prices.
“There clearly has been improvement,” says Robert Dujarric, an East Asia expert and visiting fellow at the Japan Institute of International Affairs in Tokyo. “But it’s not like the rest of the world is standing still, and compared to the U.S. or Britain, Japan is still running behind.”
Even privatizing Japan Post will be no quick fix. The process will not be finished until 2017, plenty of time for political winds to shift and successors to amend Koizumi’s plan.
But for the moment, the buzz among global investors is that Japan is the place to put one’s money. Foreign business and economic publications have tripped over each other to certify this revival. “Japan Is Back, For Real This Time,” the Far Eastern Economic Review said.
Day traders on the Tokyo Stock Exchange have driven volumes to record highs, and billions of dollars of overseas money is pouring into Japanese markets. More than $40 billion entered the country from May to September.
Indeed the recent economic news has been so sunny that a usually dour central bank has mused that consumer prices might rise by a fraction next spring. That would end a decade-long skid in prices that even four years of free money -- that’s right: 0% interest -- could not reverse.
But even some who are convinced that the recovery is real warn of a political backlash against the reformist agenda. They point out that it has come at the price of Japan’s traditional social solidarity, compromising its cherished egalitarian streak.
Lower corporate debt and rising profitability have been accomplished by cutting labor costs, mostly by moving workers from full-time jobs with full benefits to part-time contract work with few.
Data released this month showed that 23% of Japanese households have no savings, a shockingly high number in a country renowned for good saving habits. That makes some wonder whether Japan is moving into the uncharted territory of a widening gap between the haves and have-nots.
While Tokyo and Nagoya flaunt conspicuous affluence, other regions are stuck with boarded up businesses and low consumer confidence.
“I’m optimistic about the overall economy, but it will be better only for the limited number of rich,” says economist Takuro Morinaga, author of “It’s Cool to Be Poor” and other books on the decline of the Japanese middle class. “In a very short period, Japanese society will be like the U.S.: The strong prey upon the weak.”
Many observers say Japan retains a well of conservatism, with the patience and power to let what it sees as a tempest of reform blow over.
“The Japanese have a strong egalitarian trait and for some, liberalization means injecting inequality into the system,” Dujarric says. “We should not assume that reforms are irreversible.”
Perhaps. But many say that the changes cannot be stopped, that the forces of reaction are losing the struggle and the old Japan is slowly strangling.
“People got tired of the old traditional politics,” Louis Vuitton’s Hata said. “The old-fashioned business guys are still around. But they are losing influence year by year.”
*
Hisako Ueno of The Times’ Tokyo Bureau contributed to this report.
