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Commentary | Pacific Prospect

Japan Faces Slow, Troubled Journey Back to Productive Prominence

A leviathan economy that once seemed invincible is being held down by a minnow of a political system.

March 08, 2000|TOM PLATE | Times contributing editor Tom Plate's column runs Wednesdays. E-mail: tplate@ucla.edu

If the U.S.-Japan alliance is dependent on understanding, then it's in big trouble. For it doesn't seem likely that the United States will ever quite understand Japan. Consider last week's release of new figures suggesting that Japan's gross domestic product actually fell from October to December. At the rate it's going, this once-Olympian economy, runner-up only to the U.S., might wind up closer to third-place Germany than to the top spot. Japan has run up more than $3 trillion in government bond debt, more than any other nation. Its population is both aging and shrinking in number, an expensive combination, and there's not enough money put away to meet future pension obligations.

Bizarre business anomalies also throttle the economy. The nation's massive and troubled life insurance business, for instance, is required to invest customer premiums in government bonds that return only 1.6% to 1.8% annually. Then these companies have to pay out to beneficiaries an amount that far exceeds what they can earn on the premiums. This year alone, the mismatch should cause the top 11 insurance companies to lose more than $26 billion. What a way to run an industry.

So let's change things real quick, right? Let's fix the insurance industry and a dozen other serious problem areas and get the economy moving again. Let's open those markets, stimulate domestic demand and clean up the banking system--time is running out. Get the political establishment cracking. It should be so simple. Yet, it's anything but.

The brutal truth of Japan's Achilles' heel surfaced anew at a confidential session earlier this year at the World Economic Forum in Davos, when a panel of experts, Japanese and not, were openly worrying about Japan. Suddenly, a prominent member of the Japanese parliament, well-known in his country, rose from the audience with the heart and courage to tell the truth. He said his nation's problem is neither the much-discussed issue of the so-called immobile culture, and certainly it is not a lack of collective intellect or industriousness. The problem is the political system: It's a waterlogged, gridlocked, broken-down shambles. Fettered by interlocking coalitions, corrupt politicians and payoff politics, it is to today's modern, with-it Japan what the old Monopoly board game is to PlayStation 2: hopelessly dated and as useless for telling the full story of Japan as a Geisha cliche. The governance system, inherited at the end of World War II as the successor to a strong-emperor system, struggles just to keep a parliamentary coalition operating, rather than moving the country forward. In its own Japanese way, it's nothing less than a political Tiananmen Square: It massacres the hopes of the people, though without firing a single shot.

Japan has not been standing entirely still, despite its politics. It has put a number of scandals and bad debts behind it, and it has been restructuring the manufacturing sector. What's more, there are signs that savings-obsessed consumers have been developing the confidence to spend more (thus stimulating the economy). Big-time Western multinational players are still playing. General Motors will be working with Toyota in a kind of partnership. General Electric has put $16 billion into Japan; Renault has acquired 38% of Nissan. Many smart players believe in Japan, even though it is now down.

"An investment opportunity like this comes up once every 50 years," says Kenneth Courtis, vice chairman of Goldman Sachs, Asia. The betting is that Japan will roar back again before too long. But how long is too long? "It will take another four or five years before a new future begins to crystallize," guesses Courtis, who predicted both the surprising Japan downturn and the surprisingly quick South Korean upturn. "Japan will get there, but not in a straight line."

This week, for instance, even the doldrums Diet, awakened by gales of public opinion, is to begin a grand debate on the creation of individual pension plans, just as ordinary people in the U.S. have portable 401(k) plans. This may seem only a slight technical adjustment to us. Yet for Japan it would be a monumental change. The very idea of the Japanese needing such a pension system--because now they may have to move from job to job--is revolutionary. The equivalent in the U.S., in so many ways an opposite kind of society, would be if Congress were to make corporate downsizing of a work force illegal.

In reality, under Japan's surface, subterranean forces are swirling in the deep that won't make it to the surface for years. When they do, though, they will be as large and awesome as a whale surfacing. Yet the whale will have to find its way with only a minnow of a political system to guide it.

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