Tokyo teaches painful lesson Japan's answer to recession could prove to be the envy of Europe and US
Jonathan Watts in Tokyo Tuesday August 20, 2002 The Guardian 'If this is a recession, I'd like to have one in my constituency". These words, uttered by an incredulous British minister during a recent trip to Tokyo, are being echoed with increasing frequency as the rest of the world starts to grapple with the sort of economic problems that Japan has lived with - in some style - for more than a decade. While the United States and Europe are struggling for the first time in 70 years with the sudden bursting of a speculative bubble, plunging stock prices and a growing fear of deflation, they are things Japan has learnt to live with. Since the spectacular collapse in Japanese share and property values started in 1989, the country has by turns been demonised as a threat to the world economy, sympathised with for the plight of its suicidal salarymen or discredited for the government's unfashionable attempt to spend its way out of a slump. But as the US and others start to show many of the same symptoms that it experienced at the start of the 1990s, many Japanese are asking how other countries will cope with the domestic and global repercussions. Senior Japanese business leaders are already pointing across the Pacific to identify the big risk to stability. Last week, Hiroshi Okuda, chairman of the Japanese business federation, called the fall of prices on Wall Street, "a serious crisis for Japan". Nobuo Yamaguchi, chairman of the chamber of commerce and industry, warned that it would have a large negative impact on Japanese banks' efforts to dispose of their bad loans. Although Japan can only lose from the slowdown of its leading export market, there is a certain feeling of schadenfreude in Tokyo that the accusations of crony capitalism that were levelled at Japanese executives and politicians during the Asian financial crisis are now being aimed at US congressmen and the chiefs of Enron, WorldCom and a host of other disgraced companies. Western financiers and central bankers now visit Tokyo with rather more humility than they have done at any time in the past decade. Where once they came to lecture Japanese officials on the need for deregulation and laissez-faire capitalism, now they come to learn from the country's monetary mistakes and its success in easing the social impact of a protracted recession. The new view of Japan as a portent rather than an aberration has been apparent since the publication of a paper issued this summer by the US Federal Reserve entitled "Preventing deflation: lessons from Japan's experience in the 1990s." It drew the remarkable conclusion that "deflation is more debilitating to economies - and harder to control - than inflation," a significant departure for central bankers who have long been conditioned to regard rising prices as their biggest enemy. Since that paper came out, analysts at major brokerage houses have issued reams of reports on the possibility of the United States sinking into a Japan-like slump, a once-in-60-years depression rather than a simple cyclical recession. It is a terrifying prospect. By just about any statistical reckoning, Japan - the world's second biggest economy - has been a basket case for 12 years. In that time, stocks have collapsed by 70%, land prices by 80% and golf-club memberships (an important gauge of business activity) by 90%. Altogether, asset values have shrunk by a staggering 1,400 trillion yen (£8trillion) - equivalent to wiping out the entire output of the British economy for more than 10 years. The banking system has been teetering on the edge of collapse for five years, a majority of companies are bankrupt in everything but name and with public debt at a record of 140% of GDP, Japan's credit rating has been downgraded to levels more usually associated with impoverished African nations. The longest and deepest slump that Japan has suffered since the second world war has been made worse by deflation, an economic phenomenon not seen in a developed country since the great depression of the 1930s. But the bad times, it seems, have never looked so good as thousands of visiting fans and journalists observed during the World Cup, when they were awed by stunning new football stadiums, bustling entertainment districts and streets thronging with stylishly-dressed shoppers and gleaming cars. Throughout the summer, local governments the length and breadth of the country are staging extravagant displays with hundreds of fireworks, some of which cost more than £10,000 pounds a piece. And as a forest of cranes testifies, central Tokyo is in the midst of a building boom. Next year the capital will see a record 2.2m square metres of new office space That this is possible after a 12-year economic implosion is largely thanks to huge public spending, which has filled the gap left by consumers and companies who are trying to pay down the debts left after the fall of house and stock prices. Monetarist economists in the West, who have spent the last decade urging Japan to initiate a bloodbath of painful structural reforms, say such spending and the infusion of government cash to prop up ailing banks and companies is merely delaying the day of reckoning. But as more countries suffer similar symptoms, another view is gaining ground: that free-market capitalism - which works effectively if painfully in a normal recession - is at best useless and at worst counter-productive in a depression. Supporters of this theory claim Japan has achieved a second economic miracle in keeping its economy afloat for so long with interventionist government spending. "When the bubble burst, Japan faced an identical pattern to that of the United States at the start of the great depression in the 1930s, yet we stayed around zero per-cent growth. That is miraculous," said Richard Koo, chief economist at the Nomura Research Institute, and an influential government adviser. "I think Japan's fiscal stimulus is one of the most successful policies in the history of mankind. It held in place tremendous deflationary pressures." Mr Koo says that when he recently visited Washington, the White House assistant for economic affairs, Larry Lindsey concurred that the US faces a balance-sheet crisis like Japan's. Most economists, however, say a rerun is unlikely because the similarities between the US and Japan are not as significant as the differences. They say the former has a stronger financial system and sharper central bankers whereas the latter's problems are compounded by a rapidly ageing society and a lack of political leadership. But there is another difference that is potentially more worrying for the global economy. Japan is the world's greatest creditor nation, whereas the United States is the biggest debtor. Even during the past 12 years of stagnation, Japanese savings have increased, which has effectively allowed the government to borrow from its own citizens to pay for repeated fiscal painkillers. For this reason, Japan's problems have mostly been contained within Japan. No other major country has the resources to do this on anything like the same scale. If the United States needs another 1930s-style New Deal, it is unlikely to have such easy access to funds. In that sense, the most frightening lesson that could be drawn from Japan's experience is that the government in Tokyo has been getting it right for the past 12 years. A depression eased by football stadiums and firework displays could yet be the envy of the world.
