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NO. 1 — January 9, 1998

 

Feature Article

JAPAN'S MID-LIFE ECONOMIC CRISIS: SIMILARITIES AND DIFFERENCES WITH EAST ASIA'S TROUBLES by Arthur J. Alexander

Summary

The Japanese economy, like many middle-aged individuals, is encountering several ailments simultaneously. Some are based on the simple fact of maturing. Other problems, though, are what Japanese medical specialists call life-style ailments. They do not need to happen but do as a result of unhealthy habits. Japan differs from its economically stumbling neighbors like South Korea, Thailand, Indonesia and Malaysia in that many of its aches and pains are an outgrowth of the maturation process. However, all East Asian countries share to some degree the same bad economic habits.

Economic maturity is defined by a high level of capital in relation to a country's output and labor force. When this stage is reached, the returns to further investments in capital formation decline and productivity gains from that source dry up. Inevitably, overall economic growth slows.

An unhealthy economic life-style comes mainly from the noneconomic allocation of capital and the weak competitive forces that prevail in parts of a nation's economy. In certain respects, segments of the Japanese economy and larger sectors of its troubled neighbors' economies face the same problems as countries in Eastern Europe making the transition from planned, communist economic systems to more open, competitive capitalist economies: too many resources are in the wrong industries. Moreover, because of weak competitive pressures, these resources are used inefficiently compared with what is demonstrably feasible elsewhere.

Two other components of an unhealthy economic life-style are incomplete financial markets and insufficient deregulation. The preservation of controls on one area of a nation's financial system while other parts are free to engage in market operations can produce disequilibria in which incentives created by market opportunities are thwarted by continuing regulation. This situation can produce large, destabilizing flows of capital that create profound problems for the economy as a whole. Although Japan's financial distress since 1991 has not reached crisis proportions, it has hamstrung the country's economic performance. Among some of Japan's Asian neighbors, crises already have arrived on the scene.

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Weekly Review

TOKYO UNVEILS TWO-PART BANK RESCUE PLAN by Douglas Ostrom

The seriousness of Japan's banking and economic crises was underlined Christmas Eve by two actions little reported in the United States. The Ministry of Finance announced that it would relax a series of capital adequacy rules designed during the past two years to restore the banking system to health. At the same time, the Liberal Democratic Party and its two parliamentary allies endorsed a plan that could have the effect of pumping ¥30 trillion ($250 billion at ¥120=$1.00) into the banking system. One aspect of the plan, which will be submitted to the soon-to-start next session of the Diet, arguably could lead to the partial nationalization of the banking industry. Analysts generally agree on the seriousness of the difficulties confronting Japan, but they have divided on the appropriateness of the two-pronged response.

 

HASHIMOTO CABINET SUBMITS SLIM FY 1998 BUDGET by Jon Choy

Beset on all sides by conflicting interests and demands, Prime Minister Ryutaro Hashimoto's cabinet approved December 25 an initial spending and tax plan for the fiscal year beginning April 1 that clamps down on some categories but lets others expand. Coming at a time when domestic and overseas confidence in the immediate course and health of the Japanese economy is near a nadir, observers were watching closely for bold stimulative actions when the FY 1998 budget plan emerged from the final round of cabinet-level negotiations. While Mr. Hashimoto delivered on previous budget-related pledges, he disappointed those expecting major new initiatives. The consensus among economists in Japan seems to be that the proposed budget will be a washout when it comes to influencing macroeconomic factors. Opinion is divided, however, on the budget's impact on consumer, investor and business confidence.

 

FISCAL REFORM FORCES JDA TO SCALE BACK FIVE-YEAR DEFENSE BUILDUP by Barbara Wanner

Japan Defense Agency officials now may view nostalgically the postwar years when their organization's budget request received preferential treatment from an otherwise tight-fisted Ministry of Finance. While progressively smaller increases in recent JDA budgets suggested that defense spending was losing its "sacred cow" status, the December 19 decision by the cabinet of Prime Minister Ryutaro Hashimoto to slash by ¥920 billion ($7.7 billion at ¥120=$1.00) the Defense Agency's ¥25.2 trillion ($210 billion) FY 1996-FY 2000 defense program drove home the point that no government bureaucracy will be spared the pain of fiscal reform.

 

TOKYO SLASHES FOREIGN AID, SPARES HUMANITARIAN, ENVIRONMENTAL ASSISTANCE by Eric Altbach

Japan's foreign policy establishment had known for months that budget politics would wreak havoc with FY 1998 official development assistance funding. Nonetheless, the December 25 decision by the cabinet of Prime Minister Ryutaro Hashimoto to slash the foreign aid budget for the year starting April 1 by 10.4 percent to ¥1,047.3 billion ($8.7 billion at ¥120=$1.00) still was something of a shock to policymakers accustomed in the 1990s to defending Japan against charges of inadequate international leadership by pointing to its standing as the world's biggest ODA donor.

 

Notes

JAPANESE LIQUOR TAXES

An old thorn in the side of Japan's trade relations with the United States, Canada and the European Union was plucked out in mid-December when Washington and Tokyo agreed on accelerated implementation of proposed changes in Japanese liquor tax rates. American, Canadian and European distillers long have charged that Japan's stratified system of liquor taxes discriminates against imported beverages and limits their market share. After years of talks yielded little progress, Washington, Ottawa and Brussels petitioned the World Trade Organization for relief in 1995. The WTO dispute-resolution panel sided with the three plaintiffs, a position that was upheld despite an appeal by Tokyo in October 1996. Since then, the Japanese government has been negotiating with the three complainants to define a "reasonable" period of time in which to implement the WTO-mandated changes (see JEI Report No. 9B, March 7, 1997).

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