Japan's Economic Woes

Floundering economies effect us all. That is part and parcel of globalization and the interconnectedness of market economies. So how does the second largest economy impact the world? I would say, in many ways. If the US sub-prime ripple shook the world, the failure of the Japanese economy would hurt us in many more ways. First of all, they, much like the US, are consumers. That keeps the market turning to some extent. They are also investors. Not only in the US economy, but also, and more importantly in China. A continued downturn in Japan could have economic ramifications worldwide. Not to mention, a rise in nationalism and right and left wing groups in Japan, who are more than happy to capitalize on such events. Anyways, here is an interesting article I found in The Economist.

The world's second-biggest economy is still in a funk—and politics is the problem

THE ghost of Japan's “lost decade” haunts the United States. As the consequences of America's burst housing bubble are felt through financial markets, it has become popular to ask whether Japan's awful experience of boom-and-bust has lessons for other rich countries facing, at best, sharp slowdowns. Japan's property-and-stockmarket bubble burst in 1990, creating bad loans equivalent in the end to about one-fifth of GDP. The economy began growing properly again only 12 years later, and only in 2005 could Japan say it had put financial stress and debt-deflation behind it. Even today the country's nominal GDP remains below its peak in the 1990s—a brutal measure of lost opportunities.

Yet ghosts can deceive. Similarities exist between Japan then and America today, notably the way that a financial crisis threatens the “real” economy. But the differences outnumber them. Japan should indeed be a source of worry—not, however, because other rich countries are destined for the same economic plughole, but because it is the world's second-biggest economy and it has not tackled the fundamental causes of its malaise.

A tale of two crunches

Even by today's gloomiest assumptions, Japan's bust dwarfs America's, if in part because its boom did too. Take for instance the collapse in the equity market. America's S&P 500 is down just 8% from its 1999 peak. The Nikkei 225 share index is now nearly two-thirds below its 1989 peak. In commercial property the comparison between the two boom-and-busts is almost as dramatic.

The more important difference, though, is how each country got into its mess and then responded to it. In America, the government can be blamed for inadequate oversight of the vast market in slicing and dicing mortgages, but it has reacted aggressively to the bust, with monetary and fiscal stimulus. Financial institutions are busy declaring their losses. In Japan, the government was deeply complicit in puffing up the market and complicit, too, in hiding the ensuing mess for years.

Japan's economy is still held back by its politicians (see article). Though much has changed since 1990, a cyclical slowdown is now laying bare Japan's structural shortcomings. A few years ago, people hoped that Japan, which is still a bigger economic power than China and has some marvellous companies, would help take up some of the slack in the world economy if America tired; that now looks unlikely. Productivity is disastrously low: the return on new investment is around half that in America. Consumption is still flagging, thanks in part to companies' failure to increase wages. Bureaucratic blunders have cost the economy dearly, and Japan needs a swathe of reforms to trade and competition without which the economy will continue to disappoint.

The Liberal Democratic Party (LDP), which has ruled for the best part of half a century and remains a machine of pork and patronage, has given up trying to tackle these problems. What reformist tendencies it had under the maverick Junichiro Koizumi, prime minister between 2001 and 2006, have now gone into reverse. To make matters worse, last July the opposition Democratic Party of Japan (DPJ) won control of the upper house of the Diet (parliament). The constitution never envisaged upper and lower houses of the Diet being controlled by opposing parties, and since the upper house has nearly equal powers to the lower one, the opposition can frustrate virtually every government initiative.

Thus Yasuo Fukuda, prime minister since September, spent his first four months in office fighting to reauthorise a solitary refuelling ship operating in the Indian Ocean. Now the government is locked in grinding battles with the DPJ over bills to authorise a budget for the fiscal year that starts in April and to appoint a new governor of the Bank of Japan on March 19th.

But the problem is not merely a constitutional one. Japan is at an uncomfortable point: no longer a one-party state, yet still far from being a competitive democracy with rival parties alternating in power. Both main parties are riven by contradictions: both contain modernisers alongside a grizzled old guard of conservatives and socialists. Political chaos has allowed the old forces within the LDP—the factions, the conservative bureaucrats, the builders and the farmers—to reassert their influence. Meanwhile, the DPJ's leader, Ichiro Ozawa, who used to have a reformist streak, now sounds like an old-style LDP boss.

Japan's politics is skidding for the buffers. The crash may come as early as March, over budget differences. One way to avoid it, some politicians think, is for the LDP and the DPJ to form the kind of “grand coalition” which Mr Fukuda and Mr Ozawa talked about in November. This plan was thwarted when the rest of the DPJ leadership, rightly, balked: in effect, it would have taken Japan back towards being a one-party state, distributing largesse rather than reforming the economy.

Time for a good wash

Yet the buffers may be the best place for Japan. Or rather, a general election—perhaps a string of elections—offers the best chance of forcing parties to confront their inconsistencies, offering voters real choices rather than candidates who compete to bring home the bacon.

There are glimmers of hope. A cross-party group of modernising politicians, academics and businessmen has formed a pressure group, Sentaku (with connotations both of choice and of giving things a good wash). Radically, they want to decentralise the top-heavy system in which local politicians are in thrall to Tokyo's pork providers; they think the main parties should campaign on coherent manifestos; and they are urging ordinary Japanese, who do not readily bother their heads about such things, to reflect on the folly of voting for politicians who smother their districts in unused highways and bridges that lead nowhere—the visible blight of failed politics.

Many politicians say a general election would only add to the chaos. That is the argument of a political class grown fat on a broken system. Voters need a chance to start putting it right. If choice is chaos, bring it on.