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Japan: New Prime Minister Under Pressure To Stimulate Economy

  • Mark Baker

Hopes are high that Japan's new prime minister will take bold steps to improve the economy, the world's second-biggest. But Japan's economic problems -- including a weak banking sector, falling export earnings and 10 years of stagnation -- look intractable. RFE/RL correspondent Mark Baker spoke with an expert at the Japanese bank Nomura in London who explains what went wrong in Japan following the boom years of the 1980s and how difficult an economic recovery will be there.

Prague, 25 April 2001 (RFE/RL) -- Japan's dominant political group, the Liberal Democratic Party, or LDP, yesterday elected Junichiro Koizumi to be its new leader. Koizumi is now widely expected to be named new prime minister in a parliamentary vote tomorrow (Thursday).

Koizumi's biggest task is to pull Japan's economy, the world's second-largest national economy after the United States, out of a 10-year slump. Leaders in the U.S. and Europe, seeing their own economies slowing, are increasingly looking to Japan to help share the burden of supporting global growth.

The Japanese government today confirmed the economy's continued weakness. It lowered its growth estimate for the last quarter of last year to an annual rate of just 0.7 percent -- below growth in the United States and the European Union.

The government said the downgrade was due primarily to falling demand for Japanese exports. The Japanese economy is highly dependent on exports, much of them high-technology products to the United States.

John Higgins, the chief economic strategist at the Japanese bank Nomura in London, says Koizumi's options for turning the economy around are limited both by Japan's dependence on export markets and the unique structure of its economy.

He explains that the Japanese economy, although market-based, differs fundamentally from that of the United States or Western Europe because of a special system of cross-ownership dating from the end of World War II, in which banks own major shares of industries, and industries in turn own the banks.

Higgins explains how the system got started:

"[After World War Two], Japanese companies, in order to protect themselves from overseas competition, invested in each other very aggressively in what we call a 'keretzu' type structure, in which a bank would typically own shares in its key borrowers and those borrowers would own shares in the bank, and so forth."

Higgins explains that this highly integrated model functions well when general economic conditions are good.

"This so-called cross-sharing-holding arrangement works very well when the economy is in a boom phase because as a bank [for example] my shares in you as a corporation are rising therefore my profitability is rising. Your profitability is rising because you own shares in me."

During the 1980s, the Japanese economy boomed, fueling widespread admiration for what economists called the "Asian" variant of capitalism. This variant, which inspired imitation throughout Asia -- including some countries of Central Asia -- featured close links among banks, businesses and government, and emphasized "consensus" in economic decision-making over the more traditional Western focus on "competition."

Ben Slay, an analyst with the Washington-based economic thinktank PlanEcon Inc., says the Asian variant, by fostering close links between businesses and capital, encouraged rapid growth but also reinforced negative tendencies toward what he calls crony-capitalism:

"It really turned out that the state directing the economic development in these countries, especially through the state's links to banks and companies, really turned out to be a model for disaster."

In Japan, the boom faded quickly. By the early 1990s the limitations of the Asian variant were becoming apparent. As companies' share prices fell, the banks -- major shareholders of and lenders to these companies -- found their profits shrinking. At the same time, the demand for new loans, the banks' core business, was weak.

Higgins says this is essentially where the Japanese economy is now, almost 10 years later. He explains that many of the banks' shareholdings in companies are worth a fraction of what they once were. And he says the amount of bad loans, made in many cases simply to keep companies afloat, is a major drag on bank's ability to lend further.

The government estimates the amount of bad debts on the banks' books at more than $260 billion -- enough to put a severe strain on the already weak global economy. Other estimates say the amount could even be higher.

To ease worldwide concern over the banks' health, earlier this month the Japanese government proposed a unique scheme to give banks a two-year deadline to dispose of their bad debts. According to the plan, a special fund would be created to take on the banks' huge equity portfolios.

Higgins describes the purpose of the fund:

"What the government of Japan is proposing is effectively to try to get rid of that -- if you like -- 'overhang' on the banking system by creating a separate entity that will purchase those cross share-holdings off the banks and allow them to get on with their normal business, which should be lending and asset management."

The plan to create the fund has wide international support but is opposed by some in Japan who say that allowing banks to quickly dispose of their shares will only depress prices on the Tokyo stock exchange further and hurt individual investors.

Koizumi, the country's ninth prime minister in 10 years, clearly has his work cut out for him.

He will have to move quickly. Parliamentary elections are scheduled for July and analysts say that Koizumi must show voters he is serious about reform. Otherwise, he and his LDP party are likely to pay at the polls.