No. 46 — December 13, 1996

Feature Article


A Lecture by Douglas Ostrom and Jon Choy
of the Japan Economic Institute


The problems plaguing Japan's financial sector rank among the defining events of that nation's economy in the 1990s. In a pair of mid-November talks to a Washington, D.C. audience the Japan Economic Institute's two senior economists offered some fresh insights on this subject. In diagnosing the origins of today's situation Douglas Ostrom highlighted a number of contributory or determinative policy shortfalls, including the failure of Japanese regulatory authorities to heed the lessons learned by the United States in dealing with the problems of its own financial sector in the 1980s. Jon Choy then explored the corrective actions that the Ministry of Finance has initiated or plans to take. Current policy prescriptions, he argued, also are flawed since they target the symptoms of the financial sector's troubles rather than the causes. Recent statements by policymakers in Tokyo suggest, however, that more appropriate approaches are under consideration.

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Weekly Review

--- by Douglas Ostrom

Few events have demonstrated so vividly how expectations regarding the Japanese economy have changed as reactions to the Economic Planning Agency's December 3 release of the latest gross domestic product statistics (see Table). As recently as the early 1990s, analysts would have been virtually unanimous in declaring that the economy's performance in the July-September quarter — when seasonally adjusted GDP expanded 0.4 percent on an annualized basis after inflation — was just short of calamitous, particularly coming on the heels of a contraction in the previous quarter. Yet many analysts actually were cheered by the fact that the economy avoided two consecutive quarters of shrinkage.


--- by Jon Choy

Notwithstanding the several waves of deregulation and reform sent coursing through the domestic telecommunications market in the past decade or so, government and private observers agree that Japan's telecommunications industry and infrastructure lag behind American and European counterparts. Moreover, the consensus in Japan (and abroad) is that the gap is growing — not shrinking — as U.S. companies rush to become part of the Internet, build internal corporate intranets, launch interactive cable television and satellite television systems, provide new forms of mobile communications services and restructure local telephony markets. Responding to these foreign competitive pressures, the Ministry of Posts and Telecommunications and Nippon Telegraph and Telephone Corp. agreed December 5 to recast Japan's largest common carrier into four companies in order to boost its international competitiveness as well as spur competition in the domestic communications market. This drastic restructuring will require Diet approval of legislation lifting the current ban on holding companies and providing special tax breaks for the restructured NTT. If political leaders fail to lift the holding company ban or deny NTT its desired tax breaks, NTT president Junichiro Miyazu warned the day of the announcement, the "agreement will be a scrap of paper." Although the MPT/NTT pact offers the best chance yet of significantly shaking up Japan's telecommunications market, many details remain to be worked out, and the pact's approval is far from certain.


--- by Barbara Wanner

Although fresh from a series of generally successful one-on-one meetings in Subic, the Philippines with other leaders of the Asia Pacific Economic Cooperation forum, Prime Minister Ryutaro Hashimoto in a November 29 speech opening a 20-day extraordinary Diet session made it clear that his energies and attention over the near term would be focused principally on problems at home. Responding to a recent string of political and bureaucratic scandals, Mr. Hashimoto, in an unusual move, used his policy address to take the nation's civil servants to task for "a series of events that have caused a plunge in [public] confidence in government administration." He further vowed to initiate sweeping reforms of Japan's administrative, economic and social welfare systems, adding that he is ready to "burn himself to ashes" to overcome anticipated obstacles. Later in his speech the prime minister also stressed the importance of U.S.-Japan security ties and indicated his government's intention to strengthen relationships with Asian countries, particularly the People's Republic of China. Mr. Hashimoto expressed concern, however, that achievement of government initiatives, whether domestically focused or regional or global in nature, would be frustrated unless public trust in politicians and the bureaucracy was restored. Toward this end the Japanese leader assumed "political responsibility" for failing to prevent career civil servants from getting into trouble. At the same time he urged greater discipline among the legions of central and local government bureaucrats.


--- by Christopher B. Johnstone

In a sign that Sino-Japanese relations slowly are improving Tokyo announced November 29 that a government panel had given preliminary approval to Chinese requests for Japanese foreign aid loans to support 22 industrial and environmental projects. That statement marked the end of the de facto suspension of concessionary lending to the People's Republic of China that was initiated after the Asian giant conducted several nuclear weapons tests in 1995 and 1996 (see JEI Report No. 34B, September 15, 1995, and No. 22B, June 14, 1996). In part as a result of political pressure from the Liberal Democratic Party, grant assistance to China — which formally was suspended after an August 1995 test — remains on hold, although Ministry of Foreign Affairs officials have expressed hope that such aid will be resumed next year. Funds for the 22 foreign aid projects — the exact total of which has yet to be determined — reportedly will be disbursed during the current fiscal year. They will form the first installment of a three-year official development assistance loan package expected to total some ¥580 billion ($5.8 billion at ¥100=$1.00).



The Ministry of Finance announced a plan December 4 to bring Japan's system of liquor taxation into line with a World Trade Organization dispute-settlement panel's finding that the current process of taxing various types of distilled beverages at different rates contravenes international trade rules. That ruling formally was upheld November 1 by the WTO's appellate body, which previously had rejected Tokyo's last-ditch effort to save its liquor tax system (see JEI Report No. 38B, October 11, 1996).

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