Everyone was taken by surprise. Even the world’s leading economists could not see it coming. Japan, once the world’s economic miracle, guided by the samurai bureaucratic warriors of the Ministry of International Trade and Industry and the Ministry of Finance, became grounded in 1990. Since then the Japanese economy has continued unabatedly deeper and deeper into recessions.
As deflation causes prices to fall at about two percent annually and things cost less and less, everyone including leading companies and banks now prefers sitting on cash to investing in the real economy. Even consumers have discovered that holding cash earns higher returns since goods bought today will be cheaper tomorrow and even cheaper the day after tomorrow. But the same deflation that is making things cost less and less is also shrinking the world’s second largest economy to such a great extent that increased loan defaults, corporate bankruptcies, and unemployment are getting out of control.
Without clear reform policies, confusion has grown. Experts now concur that the days of Japan as the world’s second largest economy are numbered. This convergence of opinion is convincingly reinforced as over $2 trillion in nonperforming bank loans are exposing leading banks such as Mizuho Financial Group, Mitsubishi Tokyo Financial Group, UFL Holdings, and SMBC to irreconcilable risks. Even depression economists, once with history and theoretical tools, now are reexamining and doubting their own expertise as Japan’s recession drags the country into the zone of an emerging economy comparable to Botswana.
With domestic public and private institutions increasingly exposed to great risks, most economists now consider Japan a threat to the global economy. Even the Japanese people are increasingly accepting this view with anger, as they come to terms with this reality. Their anger, as they could not believe their eyes, is over how could it happen to an economy they all worked hard to build. The frustration grows into hopelessness because they could not do anything other than watch the economy fall deeper and deeper into recession.
But why has this recession gone out of hand? Why is it that reforms remain difficult to come by? Does this mean the failure of Japan’s economic model? Here is another contraction; how could Japan today become a global economic liability even though it still remains the world’s number one creditor nation with $1.3 trillion? It took a magisterial inquiry to find out the reality of the present devastating economic chaos Japan is in. The chaos will continue as long as there are no foreseeable solutions, as long as Japanese people continue to hide from these realities, as long as they continue to embrace their predatory behavior and planned economic system rather than change to a free-market, free-for-all economic system.
But the most important lesson to learn from this inquiry is that the neo-mercantilist economy so far aggressively driven by great export orientation has long since become old fashioned and irrelevant with the end of the Cold War. It revealed that why it lasted was simply because America and its European allies tolerated it as the Cold War gesture to Japan. But this gesture could no longer continue in the present post-Cold War period, especially since Japan is no longer strategic to the world’s only superpower and largest economy. Therefore, not only did the end of the Cold War ground an empire-building economy, but it also made it possible for the Japanese game to be replayed back to Japan. It has come to the point that Japan must agree to play by the new rule set for free competition, or should be out of the game entirely.
But even without the end of the Cold War, globalization alone would have forced Japan to abandon the empire building economic system and free ride on others’ domestic markets while tightly protecting its own domestic market. Or at least, it would have challenged Japan’s model of running two parallel economies, where one is a vibrantly competitive economy that is externally focused, and the other one is a deeply inefficient and corrupt economy that is internally protected.
There are two sins of this empire building economy of Japan. One is using the money cheaply extracted from the taxpayers (mostly through the Postal Savings Bank) to finance neo-mercantilists to aim not at profit but at building market share that drives Japan’s foreign counterparts out of competition with cheaper and better products, particularly in consumer electronics and automobiles. The other is to at the same time tightly maintain a closed domestic economy led by the samurai bureaucrats and the old political guards of the Liberal Democratic Party, who artificially create domestic monopolies reinforced by corporation-government relationships.
It is this structural corruption that is mutually reinforced by ties between government and business, between independent entities, and between management and labor that has sustained the two-economy system that rewards cronies. Because everyone is fully aware that the system’s purpose is empire building, no one opposes it. To support it at all costs, everyone does their part including maintaining high savings, low consumption, and high exports for market share rather than for profit. The government further primes the system with domestic monopoly and de facto protection.
But as Japan’s economic engine gradually runs into grinding recession, economists now offer all forms of rescue measures. Leading economists like Richard Katz believe the solution is in doing away with what they see as the fundamental structural flaws. To them that should include dramatic structural reforms of the domestic economy, from the privatization of public utility firms, to competitive financial markets, to an efficient and transparent banking system. But world-respected economists like Lester Thurow fail to agree that those reforms are sufficient to turn the economy around, without Japan dealing with the country’s inherent communitarian and familialist culture. Krugmanian economists are singing an entirely new song. They now blame miscalculations and the power of panic for the woes of this recession rather than Japan’s flawed economic model.
No matter which views are convincing, it is still in the best interest of the Japanese people to embrace major reforms. These reforms no matter what they are, cannot have significance if they fail to address Japan’s present style of capitalism by advancing economic transparency, efficiency, and democracy. It is here that Lester Thurow was completely right as he pointed out the inherent danger of communitarian culture frustrating true capitalism. Therefore, no matter how painful these changes might look, the Japanese people should realize that the changes are their only way to come out of recession.
There are great dangers in running huge budget deficits as a way of buying time. But even the “buying time” strategy will soon become more complicated, especially when the working-age population decline begins to impact the economy. In fact, the Japanese people still have all that is required to turn the economy around. They have a highly educated workforce, sophisticated managerial and entrepreneurial know-how comparable only to that of the U.S.; modern capital stock, a good tax regime, and democratically stable government.