Japan's deteriorating economy, after stagnating for a decade, has strained the government's resources to the breaking point, Finance Minister Kiichi Miyazawa warned yesterday, saying that "Japan's public finances are very near collapsing."
Miyazawa's reference to Japan's huge public debt -- even though he later apologized for speaking so bluntly -- was a staggering concession for leaders of the world's second-largest economy. His aides were quick to point out that he wasn't predicting an imminent default; rather, his comments were attempting to underscore the growing debate in Japan over how much longer the government can, or should, keep spending money to prop up the economy.
Numerous government bailout packages that pumped hundreds of billions of dollars of taxpayers' money into the economy over the past decade have left the government with the worst debt problem in the industrialized world.
Even with all that spending, the economy shrank in the July-September quarter, and some analysts expect the government to report Monday that it contracted as well in the October-December period. More recently, machinery orders plunged in January at twice the anticipated rate. Household spending dropped. So did bank lending. The benchmark Nikkei-225 stock index hit a 15-year lowlast week. Public confidence in the government has plummeted with daily media reports that Prime Minister Yoshiro Mori is struggling to cling to power.
The government is scheduled to unveil today yet another set of measures to prop up the economy. But a growing number of critics contend that such spending is a waste and will only add to a debt burden that by 2015 will make it difficult for Japan to care for its aging population.
These critics -- which include financial analysts, economists and entrepreneurs -- argue that Japan's biggest mistake has been to keep propping up a once triumphant but now outdated economic system. They say that letting it collapse, while painful in the short term, would free capital and other resources for more productive ventures that would foster real growth in the long term.
A shrinking economy? Falling stock prices? Foundering banks? Massive layoffs? Bring it on, say some. "Yes, of course!" said Yoshiaki Murakami, who worked at Japan's powerful Ministry of International Trade and Industry until two years ago.
Murakami, 41, snaps impatiently when asked if he's suggesting that Japan would actually benefit from an economic crisis. "A crisis would be good! Good, good, good, good, good!"
"Even if such a crisis does strike, it could provide an excellent opportunity to rebuild the economy," wrote Yasuhiko Shibata of the Yomiuri Research Institute, a respected research group, in a recent newspaper column assessing some of the various disaster theories.
Under Japan's system -- a kind of socialist-capitalist hybrid -- the government ensures that the major banks can keep their doors open by providing financial and political assistance. In return, the banks are expected to funnel funds into industries the government considers critical, even if the firms' earnings prospects are weak or nonexistent. Companies that do business together buy one another's stock to keep prices stable -- a practice that insulates management from U.S.-style shareholder pressure for improved performance.
The postwar system worked for years but has been incapable of generating economic growth for the past decade. And without growth, Japan will never be able to pay down its debt, maintain or raise living standards, or care for its elderly.
This problem has led many financiers and academics to advocate restructuring the economy into a more market-driven, survival-of-the-fittest system. That would involve deregulation, stronger incentives for individual achievement and the elimination of decades-old cross-shareholding arrangements. They argue that with world-class global companies such as Toyota Motor Corp. and Sony Corp., an educated workforce and superb technology, Japan would take off after a painful transition.
But the old system -- with its deeply intertwined interests -- is difficult to take apart gradually. If a bank goes under, so do its weakest customers. If the stock market drops, so does the value of assets held by companies.
Japan's politicians fear the chaos that enveloped Eastern Europe and Russia after they embraced free markets. Unlike those countries, Japan has a high standard of living, but that's largely because the government has prevented the bankruptcy of many insolvent companies.
Each brush with recession has sparked impassioned talk about the need for fundamental economic reforms. Two successive prime ministers -- first Keizo Obuchi, then Yoshiro Mori -- spoke grandly of revitalization and rebirth.
But when the time came to cut off inefficient producers that had supported them for decades, ruling Liberal Democratic Party elders opted to dip a little deeper into the national treasury and pray for a recovery.
Meanwhile, banks still are forced to make loans to longtime customers that cannot repay them, preventing those companies from going bankrupt and making it harder for new firms to borrow money. Companies still own a lot of their business allies' stock, protecting them from the harshness of the market.
After the 1998 banking crisis, "we all had a big debate about whether the economy would be better off with a soft landing or a hard landing," recalled Motohisa Furukawa, a leading member of the opposition Japan Democratic Party. But in the end the LDP bosses opted for a "never landing," he said: "They tried to defy gravity and just keep flying higher."
The current environment has led to widespread gloom-mongering. The cover of one prominent business weekly, for example, recently featured an image of a bomb with a burning fuse below the headline "Japan's Economy: The Nightmare Chain Reaction."
That popular crisis scenario focuses on the deteriorating balance sheets of Japan's banks. Meager business profits and a sharp jump in bankruptcies over the past six months have piled new bad loans onto the banks' books almost as fast as they could write off old ones.
In the past, Japanese banks were able to fall back on unrealized stock gains -- the difference between what they paid for shares originally and their year-end market value -- to cushion lending losses. But many will have trouble doing that this year because of the recent plunge in stock prices.
Nozumu Kunishige, a financial analyst with Lehman Brothers Inc. in Tokyo, estimates that if the Tokyo stock price index, which is broader than the Nikkei-225 index, remains mired at its current level of about 1250 points, unrealized gains will be wiped out for all but two of Japan's 10 major banks. If the Topix slips below 1200, all the major banks will be required to declare losses under new accounting rules that take effect in the fiscal year beginning April 1.
That could pose an enormous problem for banks and for Japan. Under terms of the 1998 bank bailout, the government injected capital into weak banks by purchasing non-voting preferred shares. But if the banks' results slip into the red, those preferred shares will convert to voting stock.
Many analysts are bracing for the de facto nationalization of at least two major Japanese banks in the next year -- possibly as early as September, the first time banks must issue half-year profit and loss reports under the stricter accounting rules.
As Miyazawa's statement indicated, even the ruling party is worried about its strategy of piling up debt because of the country's quickly shifting demographics. The average age of Japan's population is rising faster than that of any other nation in the industrialized world. The government estimates that the population will begin to shrink in 2007, and that by 2015 one in every four Japanese citizens will be over 65.
Analysts say government and corporate pension programs are woefully underfunded. And in pushing through ineffectual public stimulus programs year after year, Japan's politicians have raised the nation's ratio of total public debt to gross national product to almost 130 percent -- higher than that of any other industrial economy. By comparison, the total U.S public debt ratio was estimated to be 59 percent last year, and peaked in 1946 at 122 percent.
To maintain current living standards in the face of those challenges, Japan's workers would have to achieve Herculean gains in productivity -- the amount of economic output per hour of labor. But a host of recent studies show Japan's productivity has been stagnant for some time.
Some individual Japanese are trying to force change. Murakami attempted last year to bring off Japan's first hostile takeover but was easily deflected by one of the country's weakest industrial groups. Convinced the company could be run more profitably under new management, Murakami had offered to buy all of its outstanding stock at a hefty premium over market price. Shareholders affiliated with the financially troubled Fuyo group, who together hold about 60 percent of the company's stock, merely scoffed.
"I couldn't even get an audience with the CEO," Murakami fumes.
So while his former colleagues, in league with Japan's top business and political leaders, are scrambling to shore up Japan's creaking foundations, Murakami is rooting for a crackup.
Special correspondent Akiko Kashiwagi contributed to this report.
© 2001 The Washington Post Company