March 26, 2002 | Executive Summary on Asia
As March 31 approaches, Japan faces critical decisions regarding the future of its economy. This deadline, which marks the end of the financial year, is crucial because Japanese banks must account for their assets and performance, which may fail to meet investors' expectations. The fear is that a loss of confidence in the banks will cause widespread distress in the financial system, which could affect the United States.
Bad news in the Japanese economy is not new. Japan has experienced stagnant growth and four recessions since 1990. Real estate prices have fallen to their 1982 value, and taxpayers have paid for approximately $1 trillion in failed stimulus packages over the past decade. What makes the current recession more ominous than the previous three is that it marks the first time in modern Japanese history that asset and labor values have fallen simultaneously.
While the Bush Administration cannot spearhead the process to reverse this downturn, it can and should clearly communicate U.S. priorities to the Japanese government and people and provide unequivocal political support for efforts to enact reforms. The United States should also consider assembling key economic and financial advisers to assist the Japanese leadership in implementing reforms; creating an inter-agency task force in the Administration, overseen by the National Security Council, to coordinate communication with Japan and underscore the critical security aspect of restoring vitality and confidence in the Japanese economy; and formulating a last-resort contingency plan to insulate the U.S. economy from a possible crisis in the Japanese financial system. The contingency plan should promote strong economic growth and trade with the rest of East Asia. It should also ensure that the U.S. banking system is not unduly exposed to Japanese banks and alert U.S. businesses and investors that they will not be bailed out in the event of a Japanese financial crisis.
The Japanese government has been in denial about its economic problems for more than a decade. This denial has gradually escalated a difficult financial problem into one of enormous proportions, with potentially serious consequences for the global economy. The Bush Administration obviously cannot solve Japan's economic malaise. That task awaits action by the government of Japan under the leadership of Prime Minister Junichiro Koizumi.
Koizumi's government must end the dangerous spiral of deflation. The latest gross domestic product (GDP) figures for the fourth quarter of 2001 reveal that there was a 12 percent drop in private-sector investment. This, in effect, nullifies a 1.9 percent increase in private consumption and a 2 percent rise in household consumption for the same quarter. The leadership must act quickly to counter the prevailing mood of political paralysis.
The public's lack of faith in the Japanese leadership's commitment or ability to implement hard reforms has depressed consumer spending. In order to jump-start the economy, the leadership must therefore:
Recovering from the economic problems resulting from 10 years of willful inaction is no simple task and will not be accomplished quickly. However, failure to undertake these tough reforms will consign Japan's economy to a steeper decline that will lead to an economic crisis that harms other economies, particularly in East Asia, and undercuts a global economy that is just now recovering.
Balbina Y. Hwang is Policy Analyst for Northeast Asia in the Asian Studies Center, and Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs in the Center for International Trade and Economics, at The Heritage Foundation.