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No. 44 — November 19, 1999

 

Feature Article

THE JAPANESE ECONOMY IN TRANSITION

Arthur J. Alexander

Summary

At the close of the 20th century, Japan's economy faces four major difficulties: permanently slow growth, too much capital accompanied by depressed returns, comparatively low productivity and a fragile banking system still hurting from the collapse of asset prices in the 1990s. All but the last of these conditions existed long before the expansion and contraction of the "bubble" in the late 1980s and early 1990s.

Corporate executives and government policymakers as well as politicians now are confronting these challenges. This process, however, is taking place decades after all these problems, except for the banking issue, first arose. Nonetheless, Japan is making the transition to a more profit-oriented, bottom-line-focused economy. This shift in attitudes and behavior is being driven by a new appreciation on the part of both government and business leaders that the "miracle growth" of earlier decades is a thing of the past as well as by regulatory changes affecting financial markets.

Several factors explain Japan's delayed response to the fundamental changes in its economic environment. First, both the public and the private sector persisted in the belief that a faster pace of growth and the restoration of asset prices were just around the corner. Everyone also expected that the Ministry of Finance would continue to bail out troubled banks. Moreover, corporate Japan stuck with its practices of expanding capacity and market share at any price, lifetime employment and the cultivation of long-term business relations — rules of thumb that had been profit-maximizing in the high-growth era, but that had ceased to be so in the decades that followed. MOF's preference for fiscal conservatism, which it learned in the deficit-ridden 1970s, and the Liberal Democratic Party's protection of favored industries and groups were other reasons for the inaction.

Pressure from ongoing changes in regulation, competition and globalization has reached a sufficient level to begin to counter the inertia of past practices and habits. The fact remains, however, that the restructuring of Japan's economy has just begun. Consequently, the transition still has many years to run.

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Weekly Review

TOKYO ANNOUNCES ANOTHER STIMULUST PACKAGE
--aaa- by Douglas Ostrom

Tokyo's November 11 package of steps to invigorate the economy, the ninth since 1992, has prompted a long list of questions, but politicians put two above all others. Will economic potion number nine succeed where others have failed in creating the perception that a recovery is not merely around the corner but here? Moreover, will this feeling last long enough to capture the hearts of voters when they cast ballots for their lower house representatives as much as a year from now? Leaving nothing to chance, Prime Minister Keizo Obuchi's cabinet measured out a surprisingly large ¥18.1 trillion ($150.8 billion at ¥120=$1.00) dose of recovery ingredients.

 

IN JAPAN, SEVERAL — BUT NOT ALL — SHORT-TERM ECONOMIC INDICATORS ARE UP
--aaa- by Arthur J. Alexander

Economic indicators through September show mixed signs of an upturn in Japan. Industrial production is a sensitive gauge of economic movement, even though it accounts for only about one-quarter of total output. Factory production reached a low point in January 1999 but since has climbed about 4 percent with the usual mix of ups and downs over the intervening months. The trend, though, clearly is higher (see Figure 1). Most industries are participating in this growth. The exceptions are ones like textiles and consumer nondurables that face stiff competition from goods made in Asia and other developing countries.

 

INCREASING COALITION DISCORD, SAGGING POLLS RAISE QUESTIONS ABOUT OBUCHI'S TENURE
--- by Barbara Wanner

Pundits and political foes who have argued that the opportunism behind the formation of the governing union of the conservative Liberal Democratic Party, the even further-to-the-right Liberal Party and the centrist New Komeito would not produce a long and happy marriage soon could be proved right. Prime Minister Keizo Obuchi's recent problems certainly would seem to indicate so. Since the October 5 launch of his new government, Mr. Obuchi has stumbled badly in handling the nation's worst nuclear accident (see JEI Report No. 38B, October 8, 1999). He also has faced a firestorm of criticism from coalition and opposition lawmakers alike for the inflammatory remarks of a hawkish Japan Defense Agency appointee (see JEI Report No. 41B, October 29, 1999).

 

JAPANESE BANK LENDING TO ASIA CONTINUES TO DECLINE
--- by Marc Castellano

New data from the Bank for International Settlements show a continued reduction in Japanese bank lending to Asia in the first half of 1999. The latest decline extends a trend that began in mid-1997 (see Table) when the devaluation of the Thai baht sparked a financial and economic crisis in key East Asian countries. Outstanding Japanese bank loans to other Asian economies plunged by 39.6 percent to $74.8 billion at the end of June from $123.8 billion two years earlier — a falloff made all the more significant by the fact that banks in Japan traditionally have been the largest lenders to Asia.

 

NOTES

Japan will "actively support" the United Nations Transitional Administration in East Timor, Prime Minister Keizo Obuchi told U.N. Secretary General Kofi Annan during a November 11 meeting in Tokyo. UNTAET, which the U.N. Security Council established in late October, is responsible for the administration of East Timor at least through January 2001. That challenging job includes providing security, maintaining law and order and helping to build East Timor economically and politically so that it can function as a truly independent country.

Washington has put Tokyo on notice that it wants a replacement for the broken December 1994 flat glass market access agreement, which expires at the end of the year. This message, delivered during November 10-11 talks in Japan that the White House had requested, certainly came as no surprise to the Ministry of International Trade and Industry people meeting with officials from the Office of the U.S. Trade Representative. During last June's annual review of the pact, the Clinton administration team indicated in so many words that the arrangement had been an unmitigated failure (see JEI Report No. 24B, June 25, 1999). If anything, delegation members suggested, U.S. suppliers not affiliated with Japan's Big Three glass companies could have a smaller share of the world's second-largest glass market at the end of the five-year deal than they controlled at the start because of Tokyo's refusal to crack down on pervasive anticompetitive business practices in the domestic industry.

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