Japan's economy, one of the strongest performers in the industrialized world since World War II, has struggled through most of the 1990s. With the onset of the East Asian crisis in mid-1997, its plight has attracted increased attention from policymakers in Washington and elsewhere. Japan's economic difficulties also have elicited extensive analysis and policy proposals from a wide variety of experts on both sides of the Pacific. They include Adam Posen, an economist at the Institute for International Economics, a Washington, D.C.-based think tank. He offered a detailed analysis of Japan's macroeconomic problems and its policy options in Restoring Japan's Economic Growth, which was published by IIE in September.
In the following interview with JEI Senior Economist Douglas Ostrom, Mr. Posen begins with a summary of his principal conclusions. He also comments on developments since the book's publication, particularly the new banking legislation and the latest economic stimulus plan. Mr. Posen then responds to his critics in both the United States and Japan. He ends with an optimistic view of Japan's long-term economic prospects.
Adam Posen, a monetary economist, is widely recognized as a leading expert on the practice of central banking and monetary policy. He regularly publishes work on the monetary strategies of the Group of Seven countries, including those of the Federal Reserve Board. He also is active in discussions of the international monetary system. As part of the Institute for International Economics' response to the Asian financial crisis, Mr. Posen has concentrated since 1997 on Japan's macroeconomic policies and prospects.
From 1994 to 1997, Mr. Posen was an economist in the International Research section of the Research and Market Analysis Group of the Federal Reserve Bank of New York. In 1993 and 1994, he was an Okun Memorial Fellow in Economic Studies at The Brookings Institution, and for the two years before that, he was a Bosch Foundation Fellow in Germany. Mr. Posen is the author or coauthor of several works on monetary policy and political economy, including Inflation Targeting: Lessons from the International Experience (1998) and Disciplined Discretion: The German and Swiss Monetary Frameworks in Operation (1997), as well as the new IIE study on Japan, Restoring Japan's Economic Growth.
NATIONALIZATION OF NIPPON CREDIT BANK FAILS TO QUELL BAD-LOAN FEARS by Jon Choy
Acting at a pace that surprised many observers, Prime Minister Keizo Obuchi seized control of Nippon Credit Bank, Ltd. less than 30 hours after warning executives that the institution's financial health was unacceptable. Some observers hailed the December 13 action as the start of a new, tougher era of financial market regulation. Skeptics persist in worrying, however, that Tokyo is more focused on minimizing economic disruptions than on expeditiously cleaning up banks' nonperforming-loan problems.
TANKAN CRUSHES OPTIMISTS by Douglas Ostrom
Is the Japanese economy in the first stages of recovery or not? Two mid-December reports the Economic Planning Agency's monthly economic report and the Bank of Japan's tankan, or quarterly survey of near-term business conditions hinted at different answers and yet were not directly contradictory. The consensus that the more pessimistic report is also the more realistic one was hardly reassuring to policymakers abroad, however. They are increasingly apprehensive about the state of the global economy and had hoped that Japan finally was on the verge of recovery.
DECLINE IN JAPANESE BANKS LOANS LESS THAN REPORTED by Arthur J. Alexander
December headlines in Japan's business press highlight the continuing gloom in domestic financial circles. The bad news was not limited at mid-month to the forced nationalization of Nippon Credit Bank, Ltd. (see article in this issue). It also included the report of a record 4 percent fall in bank lending in November, the eleventh straight month of year-to-year decline. Although the Japanese banking system obviously is saddled with serious problems, the headline figure exaggerated the scale of the drop-off. Moreover, the slowdown in bank lending to businesses and individuals may mark the beginning of a long-overdue cleanup of the bad loans and the unprofitable investments that have bedeviled Japan's financial and business sectors for a good part of the 1990s.
PENDING LDP, LIBERAL PARTY COALITION SETS OFF INTRAPARTY MANEUVERING by Barbara Wanner
The November 19 agreement between the ruling Liberal Democratic Party and the conservative, opposition Liberal Party to form a coalition was intended to create a more solid governing foundation for Prime Minister Keizo Obuchi, whose administration has suffered dismal approval ratings since its late July inception. Instead, the pending union of the two right-wing parties has precipitated intense maneuvering over cabinet posts, shaken up LDP factional leadership and raised questions about the outlook for Japanese politics.