The Japanese Locomotive
With news of Clinton's escapades dominating the news recently, headlines trumpeting the grand collapse of Asia's economy have been moved to the bottom of page 24 in newspapers around the world, even in Asia. And with a looming crisis in Iraq and the opening of the Winter Olympics, it seems unlikely that Asia's financial crisis will regain its prime news-worthiness position any time soon. Does that mean the Asian crisis is over?
The answer, unfortunately, is absolutely not. Despite the temporary recovery in many currencies, including the Thai baht and Indonesian rupiah, the fundamental causes of the crisis remain unsolved, as the wholesale financial reform needed in these countries will take years. The IMF is attempting to address these concerns by attaching a multitude of conditions to its loans that will, hopefully, restructure the economic foundations that must be strong to prevent any such future crises. In the meantime, what can the world do to help Asia recover?
Many nations, including, in part, the United States, are asking not what they can do for Asia, but what Japan can do. Lester Thurow, Dean of the MIT Sloan School of Management, points out in his 1992 book Head to Head: Coming Economic Battles Among Japan, Europe and America, that in the 1950s and 60s, many Asian nations, including Japan and Korea (and to a lesser extent, Indonesia) built up their economies thanks to the American "locomotive." America provided a tremendous import market, as relatively rich Americans purchased an endless stream of goods produced in Asia. The resulting influx of US dollars over the decades boosted the economies, and standards of living, of many Asian nations.
However, the US can no longer be that engine of growth. Despite the state of its economy, the best in decades, the US trade deficit is gigantic, and politically sensitive. It cannot pull Asia out of its crisis by absorbing more imports. Japan, which enjoys a large overall trade surplus, is the world's second largest economy and Asia's largest by far. Many see Japan as the next most likely candidate to lead Asia out of its doldrums. But the "next best thing" may not be so good. Japan's economy still has not really recovered from its own financial crisis, the so-called bubble bursting in the late 1980s, and the nation has been suffering slow growth for about eight years now.
The primary cause of the continuation of this sluggishness, according to analysts in both the United States and Japan, is the lack of Japanese domestic demand. It seems that Japanese consumers simply aren't spending and consuming as much as they used to, preferring instead to save their money, or spend it on things that don't help growth -- like playing pachinko, or paying off old debts from previous spending sprees. Since the Japanese aren't spending much money, economic stimulation of growth has been low, and times are tough all around. As U.S. Trade Representative Charlene Barshevsky, said on January 30, "Japan must stimulate domestic demand. It must deregulate its economy."
Barshevsky's analysis of the cause of Japan's continuing depression may be accurate, but her solution is far easier said than done. Doug Ostrom, senior economist at the Japan Economic Institute, has recently published a study indicating that if wholesale deregulation occurred in financial services, trucking, and distribution, three industries often cited as over-regulated, about 4.6 million people would lose their jobs, pushing the national unemployment rate from its current postwar record high of 3.5% to 6.7%. And he argues that the Japanese social welfare network, which is funded by a far smaller percent of GNP than in most advanced industrial countries, isn't capable of supporting that burden.
Furthermore, the Hashimoto administration has suffered some other serious setbacks to its grand plan of deregulation, thanks largely to a raft of scandals. Most recently, the head of the powerful Finance Ministry, Hiroshi Mitsuzuka, resigned on January 27 to take responsibility for a scandal in which two Finance Ministry officials who were responsible for regulating financial houses were arrested for taking bribes from the institutions they were supposed to be regulating. Additionally, on that same day, Japanese prosecutors raided the offices of four banks (Asahi, Dai-Ichi Kangyo, Sanwa, and the now-defunct Hokkaido Takushoku) suspected of bribing the inspectors.
The bribes included not only cash, but in a seeming competition with Clinton for tawdry headlines, lavish meals at a "no-pan shabu-shabu" restaurant. Shabu-shabu is a fairly expensive Japanese dish, made of sliced beef boiled at the table in kettles of water. "No-pan" stands for "no-panties," the attire of the waitresses working in the establishment. In this particular restaurant, tables are equipped with video monitors hooked up to cameras at low angles, with which patrons can view their waitresses' "no-pan" state, making the place little more than a high-price strip club, just with better food. Philip Brasor of the Japan Times observes that "apparently, invitations to no-pan shabu-shabu restaurants are high on the list of perks" for junior bureaucrats. Instead of stimulating domestic demand, it seems that Japan's finance ministry has been busy with other forms of stimulation.
Another scandal came to light shortly thereafter when the Nihon Keizai Shimbun, the Wall Street Journal of Japan, reported that a Ministry of Finance official told Atsuo Miki, a former president of the now-defunct Yamaichi Securities, to hide gigantic losses from improper trading in 1991 and 1992. These losses contributed greatly to the collapse of the brokerage last November. Incidentally, these two Japanese scandals broke at about the same as the allegations of Clinton's affair surfaced, and the Japanese media chose to feature Clinton's escapades instead of its own domestic scandals.
Prime Minister Hashimoto, himself a former finance minister who had to resign his position in 1991 because of a brokerage and banking scandal, recently announced a high-hopes plan designed to get the economy back on track. The plan, which includes 30 trillion yen to bolster the financial system and a 2 trillion yen tax-cut plan, has met with mixed reviews. Hashimoto favors a tax cut to stimulate spending over deregulation because a tax cut is both easier and more popular than the increase in unemployment that deregulation is likely to bring. But even though the tax-cut plan is easier, many analysts seriously doubt that it will boost domestic spending, especially given the Japanese tendency toward high household savings.
So, Japan is trapped. The nation needs to spur domestic spending in order to be the import locomotive that many believe is Asia's best hope for pulling out of the crisis. But Japan cannot further domestic spending without deregulating several key industries, and it cannot deregulate without causing a rise in unemployment, which, after all, would suppress domestic demand. Hashimoto thus finds himself in an unenviable position. The rest of the world should recognize that fact, and not be so quick to point fingers at Japan for failing to shoulder its load, or to expect that Japan will be able to cure the Asian flu all by itself. To extend the analogy to its logical conclusion, the Japanese locomotive of growth is stuck in the station, the chief engineer is trying to rally his troops to fix the engine, and the troops are out at a strip joint.