“The Sadness of Japan” The Economist, Feb. 14, 2002

Is the high-growth country resigned to being high-sloth, forever?

ANXIOUSLY, the world is waiting for signs that its biggest economy, America, is resuming its growth. Many are also wondering how strongly Europe's economies might grow this year, and whether that could help the rest of the world to revive the flows of trade and investment that were such a feature of the 1990s. No one, though, is wondering whether the world's second-biggest economy, Japan, might provide further assistance. For everyone knows that it will not: the only debate concerns how long and deep its recession will be. The charitable consider Japan an irrelevance. The less charitable see it as a liability. The panicky see it as a danger. Most Japanese simply shrug their shoulders.

Next Monday, February 18th, when President George Bush meets Japan's prime minister, Junichiro Koizumi, in Tokyo, the air will be thick with attempts to paper this over. From the Americans, there will be diplomatically phrased urgings that Japan should do more to reform its economy. From the Japanese government, there will be strenuous efforts to claim that reform is under way, that problems are being solved, that new measures are being considered. The claims will even be true, in a sense: there are plans aplenty, with stages and pillars and fine aspirations. But in a rather stronger sense they will be false: reforms are not being implemented, problems are not being solved, new measures are likely to make as little progress as the old ones. Japan is in a slow, so far genteel decline.

The reformer stymied

Perhaps the saddest thing is that there is nothing new about this. The turn in Japan's fortunes began in 1990 with the crash in its stock and property markets, and then took firm hold in the mid-1990s when banks started to crumble and public borrowing lost its ability to keep the economy growing. As long ago as September 26th 1998, The Economist lamented on its cover about “Japan's amazing ability to disappoint”. A canny Japanese parliamentarian interjected that we had got it wrong. The headline ought really to have read: “The Japanese people's amazing inability to be disappointed”. He had a point: despite all the country's troubles, the same old bunch—the Liberal Democratic Party—kept on being elected to run, or at least lead, the government.

That is why Mr Koizumi's entry to office last April came as a welcome sign of disappointment. He is also one of the old bunch, but a maverick who seemed to stand for change. He grabbed the party leadership by winning support at the grassroots, and secured remarkably high ratings in opinion polls. He helped his party do well in elections to the upper house of Japan's parliament last summer. His slogan suggested that he understood that the real problem was obstruction within his own party: “Change the LDP, change Japan!” So far, though, he has failed to solve that problem and therefore has failed to deliver any noticeable reform. His modest attempts have been blocked, or put in the slow lane. Since he sacked his popular (if erratic) foreign minister, Makiko Tanaka, last month, his poll ratings have fallen. That calls into doubt the one powerful card he has had up his sleeve: the threat of calling a general election and trying to make it, in effect, a referendum on reform.

The party dinosaurs are blocking his policies—on privatisation, bank clean-ups, administrative reform and deregulation—because change threatens the interest groups that vote for them, or finance them, or both. Another possibility should also be kept in mind, however. It is that the blockers realise that reform is not terribly popular with the general public, either. Voters may in principle like a man (or a woman, Ms Tanaka) who stands against the establishment, but as soon as it gets down to real policies that might cause real pain, they are naturally less keen. This has yet to be tested in a general election. But the old guard's hunch could well be right. Their best bet is to keep Mr Koizumi only so long as he remains popular, but meanwhile to stop him achieving anything.

No silver bullets

This apparent acceptance, among the general public as well as the political old guard, of a long, slow decline is rather sad for a once-vibrant nation, but not all that surprising. Life during the decline is by no means terrible: public services and infrastructure are good, people are affluent, families are strong. And the alternative is far from easy. There is no single solution to Japan's ills: neither a depreciating yen, nor monetary expansion by the Bank of Japan, nor fiscal reform, nor nationalisation of the banks, nor privatisation, nor deregulation, nor mass bankruptcies of zombie companies will bring Japan's economy leaping back to productive life. The government needs to do all of these, over a period of years, in order to reflate demand as well as reinvigorating private enterprise and restoring consumers' confidence. All measures will be painful, in their different ways. How much easier it is simply to muddle through, slipping downhill more or less gracefully.

Which is why that is the likeliest thing to happen. Matters will turn out differently only if the Japanese public finds a new ability to become disappointed. That could occur in one of two ways: if a panic over bank deposits or a collapsing government-bond market makes them worried about their savings and determined to force change, rather as Argentines have done with their pots and pans; or if, in a general election, they finally kick out the old guard. Alas, either of these outcomes would bring with it the danger of opening the way to more extreme, nationalist political leaders such as Shintaro Ishihara, the foreigner-baiting governor of Tokyo.

It is not a pretty prospect. President Bush will know that Japan is not part of his “axis of evil”, and that it will support (discreetly) his efforts to constrain North Korea. But he should also note that, on current trends, Japan is going to be a drag on the world economy, not a help to it, that its efforts to depreciate the yen without embarking on real reform are liable to cause friction with its neighbours, especially China, and that there is some chance that its economy could genuinely collapse during the next few months and years. Japan now looks to be an irrelevance. Alas, it could well become a liability.