Japan Needs 10 More Years for Economy to Recover

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Last updated at: (Beijing Time) Sunday, December 09, 2001

Japan Needs 10 More Years for Economy to Recover - Economist

After the "lost decade" at the end of the 20th century, the magnitude of Japan's economic problems is such that it will take another 10 years to fully recover, according to an American expert on the Japanese economy.

"Japan will revive -- that's the good news. The bad news is, it's going to take ten years to get there," said Richard Katz, editor of The Oriental Economist, a monthly newsletter published in New York.

"Even if Japan does everything right today, it would take at least five years because the problems are so serious," he said in a private meeting in Tokyo organized by Toyo Keizai, TOE's publisher.

"It will be a messy battle between the pro-reform forces and the resistance forces," he said, adding that so far the forces of resistance (to reform) were winning but it was "only the second round in a 15 round fight".

Katz, the author of "Japan: the system that soured" does not pull his own punches over the scale of the challenge facing Japan's leaders.

"The changes needed are equivalent to going from Mao (Zedong) to Deng Xiaoping in China," he said.

With Japan in recession again this year (gross domestic figures released Friday show the economy contracted for two consecutive quarters -- the technical definition of recession), it is headed for recording cumulative negative growth over the five year period from 1998-2002.

Among the developed nations, only Switzerland, Sweden and Finland in the early 9190s have done so badly since the end of World War II.

As is the case with Japan, all three countries were facing a banking crisis, but unlike Japan, none of them waited 10 years to tackle it and they all got back on track to economic growth.

In Katz' view, the only concrete Japanese reform so far, the financial markets' Big Bang, has been "more than offset by other things that prevent a better allocation of resources".

"It is a case of one step forward, three steps back," he said, adding economic statistics showed that Japan is mired in "financial socialism".

According to Katz's own calculation, the percentage of loans extended by the government has grown from 16 percent in 1965 to more than 35 percent today. Publicly owned financial institutions account for 45 percent of deposits compared to 16 percent in 1965.

"The ZIRP ("zero interest rate policy") itself has the purpose of allowing zombie companies to survive," Katz lamented, on top of which he said the Financial Services Agency, Japan's financial regulator, exerts pressure on the banks to continue to lend money to moribund companies rather than pull out the plug on the life support system.

Mergers and acquisitions are supposed to promote competition and speed up the replacement of uncompetitive enterprises by new entrants.

But in Japan the mobility rate for companies (entrants/quitters compared to all businesses in operation) is the lowest in the Group of Seven most industrialised nations, at around 7.0 percent, against a ratio which ranges from 16 percent in Germany and Italy to more than 25 percent in Britain, according to Katz' own estimates.

"Merger and acquisition activity is resisting restructuring," in Japan, he said, citing as examples the creation of four monolithic banks since 1999, and the increased market share of two or three market leaders in numerous protected and uncompetitive sectors of industry.

One of the few glimmers of hope for Japan, as far as Katz is concerned, is the increased foreign presence in Japan.

"The lack of true globalisation is a big part of Japan's problem," he said.

The increase in foreign direct investment, which was at record levels in 1999 and again in 2000 (although it dropped 18.7 percent in the six months to September as a result of the slowdown in the American economy), is vital to Japan's recovery, Katz believes.

"If it continues at that rate, Japan will be at global level in seven years," he said.

Katz also regards the increase in the amount of Japanese savings entrusted to foreign fund managers as significant. It is estimated that by 2003, more than 20 percent of public pension funds and 17 percent of private pensions will be in the hands of foreign managers compared to just one percent in 1987.

"It's a tremendous pressure for corporate reform," said Katz.

"Financial reform in Japan means the capital markets prevail against the banks."

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