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(11/07/2002 - Murakami) The U.S. & Japan: It's the Politics, Stupid!

The U.S. & Japan: It's The Politics, Stupid!
By Hiromi Murakami
7 November 2002
The Daily Japan Digest

While President Bush is calling for political reform in the Middle East, he might be well advised to do the same in Japan. The recent cabinet reshuffle in Tokyo may have renewed high expectations of reformist Economy Minister Heizo Takenaka, but the old guard will do anything to protect its own interests, and the long-term global risk from the continuing death-spiral of the Japanese economy could be more serious than any threat posed by Iraq.

Mirage: For a moment last spring, it looked as if the combination of corporate cost-cutting and export gains based on the falling yen might at last create a modest but sustainable recovery. In fact, as in every previous case over the past ten years, that has turned out to be a mirage. Worse, as the truth has become evident, the Japanese government once again has resorted to tired gimmicks like using government pension funds to buy the stock of banks or having the BOJ buy shares owned by the commercial banks in a so-called price-keeping operation aimed at maintaining equity values and keeping the banks from collapsing under their Everest of bad debt.

The consequences of using these tricks are already clear. For a decade Japan has tried to combat its economic difficulties by increasing government intervention and resisting globalization--and by handcuffing its stock and commodities markets, making them less attractive to foreign investors. The result has been prolonged stagnation at home and reduced lending to the rest of Asia. That has created a drag on the recovery of the other Asian economies. This has been further exacerbated by the fact that although Japan accounts for nearly two thirds of total Asian GDP, it runs a chronic trade surplus with most of the region, forcing it to remain highly dependent on demand from the far away U.S. market.

Revealing Contrast: Indeed, contrasting Japan's performance with that of the rest of Asia in the wake of the region's economic crisis in the late l990s is revealing. Japan has tried to resuscitate its old export-led model, while resisting integration with the rest of the region. Meantime Korea and the countries of Southeast Asia have begun to wean themselves away from the export strategy by creating more domestic demand. In the process they have managed to triple intra-regional trade. As a result, while Japan has experienced little or no expansion, the rest of the region is clipping along at over 8% annual growth.

Most disappointing is the fact that the remedies for Japan's economic morass were recognized as early as the mid-1980s when the Maekawa report called for opening the market, deregulation, privatization, and a domestic demand-led growth model similar to what much of the rest of Asia has now adopted. Despite the calls for reform, little change was achieved. Instead Japan's entrenched leaders kept the old system on life support as it morphed into a huge albatross around the country's neck.

The root of this inertia is a corrupt and distorted political system that chronically produces leaders bent on misallocating resources to hold their jobs. Agricultural interests in Japan are so over-represented that they elect over 20% of Japan's political leaders even though farmers constitute less than 3% of the population. With the farm districts as its power base, it's small wonder that the ruling LDP stoutly resists any move to redistribute seats based on an up to date population census. If it did, the exercise would result in a massive shift of seats to the cities where the LDP is relatively weaker.

Double Whammy: The problem, of course, is that over the years this system has not only heavily subsidized farm production while protecting it from imports, but has also poured far more money into building little used bridges, highways, and even opera houses in sparsely-populated rural areas than it has on essential infra- structure in heavily populated urban centers. Thus Japan gets hit with a double whammy. It pays too much for food and land, while bearing the heavy costs of inefficiency and congestion due to an antiquated urban infrastructure whose renovation has been on hold for 30 years.

The longer this situation continues the more difficult it will be for Japan to pull out of its economic dive. But the situation will continue as long as the LDP is in power. Thus, the time has come for the LDP to go, and the United States, rather than blocking the exit, might be better served to help usher the party offstage, so as to achieve a very necessary regime change.

Hiromi Murakami is Senior Research Associate at the Economic Strategy Institute in Washington.

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