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Japan's Shadow Recovery

Author: Bruce Stokes
July 10, 1999
National Journal

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Question the reports that the Japanese economy grew at an annual rate of 7.9 percent in the first quarter of 1999. Ignore the headlines that the Japanese unemployment rate fell to 4.5 percent in May. Discount the news that foreign investors have pushed the Tokyo Stock Exchange to its highest level in two years. Sure, these are surprisingly good economic indicators for a Japan that was recently on the brink of collapse. But if you pump enough steroids into any economy through public works spending, such as the $86 billion the Japanese have injected this year, it’s always possible to get one or two quarters of good economic performance.

No, the most significant piece of economic news emanating from Tokyo is that the Bank of Japan has spent at least $18 billion in recent weeks to keep the yen from strengthening. The financial mandarins in Tokyo aren’t deceived by the temporary good news. They’re busy suppressing the value of the yen because they know that the much-vaunted restructuring of the Japanese economy—the necessary antecedent to true economic recovery—has yet to happen, and they hope to postpone the day of reckoning by boosting the trade surplus.

The United States can afford to help pay for Japan’s recovery through more imports and fewer exports for a while, but not forever. Nor should it do so if Japan continues to refuse to take its reform medicine. The Clinton Administration needs to pressure Tokyo to downsize its industry, deregulate its economy, and genuinely get on a sustainable economic growth path.

There is no doubt that the Japanese business landscape is changing—somewhat. Major banks have announced that they will liquidate shareholdings in their major borrowers. In the first half of 1999, there were 440 corporate mergers and acquisitions, or 20 percent more than in the first half of 1998. And retail deregulation has more than tripled the number of large-scale merchandise stores opened each year.

But signs of change in Japan were more smoke than fire.

Of the 14,500 jobs Mitsubishi Electric Corp. has announced it will cut, only 8,400 jobs will be lost in Japan; the rest are overseas. About a third of the cuts in Japan will come through attrition or slower recruitment; the remainder through early retirement and divestitures. No actual layoffs will occur. And that’s the common practice in Japan. No wonder the unemployment rate has gone down. And it isn’t likely to increase any time soon. Private jobless forecasts for 1999 average only 4.8 percent.

Business restructuring in Japan, much like employee downsizing, has been overhyped. There were nearly 19,000 bankruptcies in Japan in 1998, but that is fewer than the business failures experienced in the early 1980s. And the total value of Japanese merger and acquisitions in 1998 was still equal to only about 2 percent of the value of U.S. mergers and acquisitions that year.

Moreover, the much-praised unraveling of cross-shareholding—in which Japanese manufacturers own a piece of their suppliers and vice versa—is all relative. In 1997, the last year for which data are available, the portion of all industrial company stock held by a related company was 14.9 percent, still greater than the 13.9 percent cross-shareholding in 1987.

Japanese industry also refuses to downsize. Over the past decade, Japan added 7.7 percent to its overall manufacturing capacity, even while capacity use declined by 16.3 percent. As a result, Japanese industry is saddled with more than $700 billion in excess capital stock. Prime Minister Keizo Obuchi’s own Economic Strategy Council has recommended tax incentives to scrap industrial capacity. Washington should make it clear to Tokyo that continued failure to close factories will make it easy for America to aim trade sanctions at bloated Japanese industries.

Japan’s much ballyhooed deregulation has often promised more than it has delivered. In 1992, for example, a 215-mile telephone call cost twice as much as it did in Great Britain. By 1998, after extensive deregulation, that same phone call was cheaper in Japan, but still three times more expensive than the one in Britain because by then the United Kingdom had deregulated its telecommunications industry further. Even when the Japanese move forward, they often drag their feet compared with the rest of the world.

Japans’ continued failure to reform its economy has become a major impediment to the improvement of U.S.-Japanese economic relations. So, in addition to its ongoing efforts to open Japanese markets to U.S. products, the Clinton Administration needs to press Tokyo more forcefully to speed restructuring and to provide a more comprehensive unemployment insurance system to lessen political opposition to change.

Current Japanese unemployment compensation covers only about 40 percent of the work force, is insufficiently funded, and runs out too soon. The Japanese government’s recent workforce initiative does not go far enough in expanding jobless benefits. The Clinton Administration should put Tokyo on notice that it is unwilling to see American workers suffer in order to ease the plight of Japanese workers whose own government ignores their situation.

The process of such domestic economic adjustment is not commonly the topic of international dialogue. But Tokyo’s foot-dragging on reform leaves Washington little choice but to press for such a change.

Recent feel-good news out of Tokyo is a dangerous distraction. There is no reason to believe it reflects sure restructuring for the Japanese economy. And without that, U.S. economic problems with Japan are only bound to worsen.

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