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Japan's economy at risk of collapse

by Tom Costello, MSNBC, 11 December 2002


KYOTO, Japan, Dec. 11 -- To understand 21st century Japan is to journey through a country still charting its own course between east and west. A country of myth and tradition, of temples and pillars, that have held a nation together for 1,700 years. But today, the pillars are under strain. The world's second-biggest economy is in danger of collapsing.

"WHAT WE NEED is an acute sense of crisis," said business school professor Hirotaka Takeuchi. "And that sense being held by the majority of the Japanese."

The scope of the crisis is daunting. The Japanese economy hasn't grown in more than 12-years. The stock market, down 76 percent from its peak, is hovering near a 19-year low. The country's budget deficit is now 140 percent of GDP -- the highest of any developed nation.

And, to add insult to injury, the nation's assets are deflating. Prices, including home values, are coming down.

At the heart of it all: a banking crisis that makes America's 1980s savings and loan industry scandal look like chump change. Japanese banks are thought to be carrying $1 trillion in bad loans on their books.

Simply postponing that problem will not solve it; time will not heal this," said Robert Feldman, chief economist for Morgan Stanley in Tokyo. "I think the rest of the world has seen 10 to 12 years of not addressing the problem. And if you talk to Japanese -- who are even more cynical than foreign investors -- they will say that no matter who is the prime minister, who is in the cabinet, the bureaucracy will always get them."

Indeed, Japan has seemed paralyzed: unable or unwilling to implement the kind of reform the world says it must if it is to keep its economy from imploding.

And the world is now pinning its hopes on two outsiders to take on an entrenched political bureaucracy. Prime Minister Junichiro Koizumi and his economics minister Heizo Takenaka are reformers who are trying to patch together a plan to clean up the banks' balance sheets.

But in a shrinking economy, new bad debts pile up almost as quickly as the banks clear out the old ones. As many as 200,000 Japanese companies have all but failed.

They're being kept on life support by the banks, and a socialist government afraid that allowing the companies to fail and default on their loans will kill the banks and put huge numbers of Japanese out of work.

So the economy limps along. The irony here in Japan is that despite this economic crisis, there are no bread lines. There are no unemployment queues. This country still enjoys one of the highest standards of living in the world. For the average Japanese, there isn't much pain.

"Although there is clearly a large hole in the bottom of the ship and people are drowning in regions of Japan, if you look at the people on deck and in the first class cabins -- they're still drinking champagne" said Noriko Hama, an economist at the highly regarded Mitsubishi think tank.

And he believes Japan's ruling party and bureaucrats will stifle any attempt at reform.

"Reforms and politicians in Japan are almost a contradiction in terms," he said.

In fact, Japan's economic model hasn't changed much since the end of World War II. Then, the national imperative was to rebuild a devastated industrial infrastructure. Bank and corporate profits took a back seat to production by the likes of Toyota, Honda, Nissan and Sony. Japan exported its way to prosperity. But the model didn't change.

Today, the economy is weighed down by over-production, failed companies, failing banks, rising unemployment, and deflating assets.

"What we need is not a bandaid approach of putting bandaids all over the place," said Takeuchi. "We really need surgery and in a big way."

Takeuchi, a former Harvard University lecturer, says time is running out for Japan to reform its government, its banks, corporations, social welfare net, and bureaucracy. In short, he says, Japan needs a revolution.

"But if we do go back to the old way of doing things, that's the end of this country," he said. "I truly believe that."

Howard Baker, U.S. ambassador to Tokyo, agrees. He's spent much of the past 18 months on the job conveying Washington's message that Japan must move quickly toward reform.

"I do it regularly -- to the point where the Japanese grit their teeth when I approach," he said. "But the other day I came back and I wrote the reporting cable back to State and Treasury and I ended it by saying: `I told them what you said, but to be honest, they ain't gonna do that'."

Japan's solution will most certainly be uniquely Japanese. But the country today is at a crossroads. And the world is watching to see which way it turns.

Copyright © 2002 MSNBC
Reprinted for Fair Use Only.

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