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No. 38 — October 9, 1998

 

Feature Article

HAS JAPAN'S ECONOMY SOURED? by Arthur J. Alexander

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Summary

Japan's slow economic growth in the 1990s is the subject of new books by Richard Katz and Adam Posen. Mr. Katz focuses on economic inefficiency, which he attributes to the Liberal Democratic Party's encouragement of cartels and collusion in the 1970s as the governing party tried to reverse its declining electoral support. He proposes thorough economic reform, deregulation and opening of Japan's protected markets to imports as the ways to attack the vested interests of collusive industries. Mr. Posen acknowledges the existence of structural problems, but he claims that they have not become worse in recent years. He theorizes that strong fiscal stimulus would get the economy moving again.

Both authors ignore the low rate of return on the nation's large stock of capital — a factor that could be restraining new investment. Japan's low-yielding overinvestment may be the result of the implicit guarantees that the government extended to banks and their customers. These, in turn, produced moral hazard, thereby encouraging excess investment based on optimistic projections of future returns. The breakdown of these guarantees should lead to more profit-oriented investment than in the past. To be competitive in Japan's markets of today, which are deregulating and becoming more globalized, much of the existing capital stock should be written down to its lower economic value. Until a new equilibrium is reached, however, the world's second-largest economy could be faced with several more years of sluggish growth.

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Weekly Review

TANKAN, OTHER DATA PAINT GRIM ECONOMIC PICTURE by Douglas Ostrom

No economic relief is in sight. That is the consistent message of several recent announcements by such government organizations as the Bank of Japan and the Economic Planning Agency. Partly in response to this gloomy news, the Nikkei average of 225 leading stocks fell October 5 to 12,948, its lowest close since January 1986. Together, the data as well as a number of forecasts describe a dismal short-term future for Japan in the context of a decade of chronic economic underperformance.

 

DIET ACTS ON BANK-REFORM BILLS, BUT QUESTIONS REMAIN by Jon Choy

After months of intense debate over how best to address the nation's crippling banking problems, the lower house of the Diet approved October 2 eight bills, four of which create a legal structure for dealing with bank failures in line with a September 26 agreement between the Liberal Democratic Party and three opposition groups. The four other bills, submitted by the government, make it easier for banks to collect debts, boost securitization and sales of assets, help banks sort out conflicting claims on collateral and expand the powers of the bureaucracy to deal with the bad-loan situation (see JEI Report No. 30B, August 7, 1998). The upper house likely will follow the lower chamber's lead October 9 but certainly before the now-extended October 16 end of this special Diet session.

 

BANKS' ILLS INFECT STOCK MARKET, REAL ECONOMY SNIFFLES by Jon Choy

The never-ending saga of Tokyo's quest to restore the health of Japan's banking industry continues to burden the domestic stock market. As politicians have advanced and withdrawn various plans to help banks rid their balance sheets of nonperforming loans and to recapitalize these critical economic actors, stock prices have gyrated, sometimes wildly. The drawn-out process of developing a bank-reform compromise has had an even more insidious effect: market players have become very cynical about the government's ability to solve this as well as other key economic problems.

 

G-7 FAILS TO TAKE COORDINATED ACTION; CALLS ON JAPAN TO SOLVE FINANCIAL PROBLEMS by Eric Altbach

The Group of Seven major industrial nations pledged October 3 to act to minimize the dangers from the continued deterioration of global financial markets, but the participating finance ministers and central bankers reached no consensus on a significant coordinated response. Meeting in Washington, the officials from Canada, France, Germany, Italy, Japan, the United Kingdom and the United States issued a statement warning that the financial instability responsible for economic dislocation in East Asia and other emerging markets "poses increasing downside risks to economic activity." However, they did not agree, as some economists had hoped, to coordinate interest rate cuts to stimulate global growth. Instead, the communique called on individual countries to strengthen their own economies. As has been the practice in recent years, the G-7 representatives devoted considerable attention to Japan, exhorting Tokyo to do more to reform the country's troubled banking system and to revive domestic growth.

 

JDA SCANDAL MAY AFFECT ACTION ON KEY DEFENSE ISSUES by Barbara Wanner

To describe Prime Minister Keizo Obuchi's first two months in office as a baptism by fire may be an understatement. As if the tasks of cleaning up the multitrillion-yen bad-loan mess and jump-starting the moribund economy were not daunting enough, the premier now must contend with a defense-related scandal that could interfere with timely consideration of key national security matters. The September 30 indictments of two more former executives of electronics powerhouse NEC Corp. for breach of trust brought to nine the number of business and government officials nailed in a defense equipment overcharging scam at the Japan Defense Agency that had been unfolding since early September.

 

U.S. STEELMAKERS LAUNCH NEW TRADE CAMPAIGN AGAINST JAPAN-SUPPLIED PRODUCTS by Susan MacKnight

Here we go again. That thought no doubt went through the minds of longtime U.S.-Japan trade and industry watchers when 12 integrated steel producers and minimills plus two of their unions announced September 30 that they had charged steel mills in Japan as well as in Russia and Brazil with selling carbon hot-rolled steel sheet in the United States at unfair prices. Admittedly, this targeted country and product move in no way is comparable to the industry's June 1992 blanket assault on foreign steel (see JEI Report No. 27B, July 17, 1992). Yet, with the industry describing the three antidumping cases and a countervailing-duty (subsidy) complaint involving Brazil as the opening phase of an eventually wide-ranging campaign against "cutthroat" import pricing, the United States and Japan appear headed for another of the fights that partially defined bilateral relations from the late 1960s through the early 1990s.

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