Japan's Wooden Cabinet The new economic team won't bend from the status quo.
日本のぎこちない内閣 新経済チームは、現状から曲げることはありません。
By JESPER KOLL
Prime Minister Yukio Hatoyama and his newly appointed cabinet have one major task: to pull Japan out of its absolute and relative structural economic decline. The good news is that the Democratic Party of Japan's landslide victory has given the new ruling party a mandate and a parliamentary majority so strong that policies can be passed quickly. The bad news is that the new leadership team is populated with antireformers, socialists and union leaders who combine an open hostility to free markets, deregulation and entrepreneurship with a romantic longing for a somehow simpler, fairer economic and social system.
The line-up of Mr. Hatoyama's first cabinet, announced yesterday, leaves little doubt that Japan is about to take a giant economic step backward in both economic and financial policy. Shizuka Kamei, a former Liberal Democratic Party leader, has been appointed to run the all-important Financial Services Agency. Mr. Kamei is best-known for opposing former Prime Minister Junichiro Koizumi's deregulation and privatization drive earlier this decade. Prime Minister Hatoyama has also assigned Mr. Kamei to re-reform Japan Post. In that position, he will likely stop the postal privatization process and probably begin to reverse it.
This would be a significant mistake. Japanese savings in the nationally backed postal bank dropped to 18% last year from almost 30% in the late 1990s, creating significant profit opportunities for the private sector. If Mr. Kamei reverses course and resurrects financial socialism by not only keeping but expanding the role of the postal bank, it will be possible for inefficient companies to be kept alive through below market-rate loans. This is bad news not just for private banks and other financial institutions, but also for all other entrepreneurs. The more companies have access to cheap, publicly backed funding, the fewer real entrepreneurs will be able to compete.
Mr. Kamei, as confirmed in his campaign speeches and on his Web site, is also very outspoken in blaming U.S.-style accounting and bank capital adequacy rules as the root cause of Japan's deflation problem. He advocates that Japan must adopt only those accounting and capital rules and policies that are appropriate for Japan. Amongst these are prohibiting the forced disposal of nonperforming loans, the introduction of a five-year debt moratorium, as well as a new accounting system that abolishes the valuation of share holdings at market rates. The message is clear: Japan is different, and therefore different rules must be applied. Globalization must be reversed.
Against this, Mr. Kamei's record on fiscal prudence is impressive at first sight. He drastically cut wasteful public spending when he was construction minister for the LDP in the late 1990s. More than 20 wasteful dam-building projects were terminated under his leadership. As head of the LDP's policy research council, he killed more than 200 public works projects, savings almost 3 trillion yen ($33 billion at today's exchange rate) for taxpayers at that time, more than 0.5% of that year's GDP. However, he now seeks to reverse this and advocates the resumption of large-scale deficit spending. To cure Japan's ills he has been advocating 40-trillion-yen-worth of new public spending, which equals about 8% of this year's GDP.
Mr. Kamei's views aren't unusual in this government. Masayoshi Naoshima, the new head of the powerful Ministry of Economy, Trade and Industry, is a long-term union leader. He supports tighter labor market rules as well as greater public fund support for regional economies. His ideas are also shared by the chief cabinet spokesman Hakubuno Hirano. Also, the DPJ's leader in the upper house of parliament is Azuma Koshiishi, the de facto kingmaker in the powerful Japan Teachers Union. The new speaker of the lower house, Takahiro Yokomichi, is a longtime socialist.
All this adds up to a very different kind of government than the one Japan had only a few years ago when Mr. Koizumi was at the helm. In his first press confererence, Mr. Koizumi slammed a heavy stack of papers on a table next to his podium, pointed to them and said: "We have studied enough. Now is the time for action." His belief in creating a sense of urgency, his passion for action, and his support in human creativity and entrepreneurship created hope. More importantly, he had studied and had devised a plan.
Against this record, Prime Minister Hatoyama and his new cabinet seem unprepared. So far, the new government has set up a new bureau for national strategy, led by Naoto Kan, a popular former student activist and seasoned strategist. But it's unclear why the DPJ is doing this only now. It's possible that the party was so busy trying to win the elections district by district that Mr. Hatoyama and his advisors failed to agree on a coherent national economic strategy. It's also unclear whether they are simply focused on destroying the old LDP-led structure rather than trying to rebuild a new, more dynamic and viable growth economy. Mr. Hatoyama himself has never claimed to be particularly passionate or focused on economic policy.
This is a frightening prospect given the economic realities facing Japan. National income has stagnated for 15 years. While technically the country enjoyed its longest-ever postwar economic expansion between 2002 and 2007, that up-cycle, and every other one, was driven primarily by exports. In fact, between 2002 and 2007, domestic demand subtracted from growth.
At the micro level of corporate competitiveness, the incredible dependence on global fortunes is even more pronounced. Domestic profit margins are razor-thin. Even at the peak of the business cycle, they rarely exceed 3%. The big car companies, for example, have been losing money on cars sold domestically for many years now. Against this, margins on exports are where all the money is being made. The global factories and operations owned and operated by Japan Inc. are also significantly more profitable than local operations. Japan has become the ultimate free-rider economy, in both macro and micro terms.
Corporate Japan is responding aggressively to this gap in profit margins and relative opportunity by sending money abroad. Japanese foreign direct investment is up almost threefold over the past three years. Domestic capital investment is down about 50%. Importantly, this great hollowing out is not just occurring in the manufacturing sector but increasingly in other sectors such as food, retailing and services too. If Mr. Hatoyama and his new cabinet don't induce corporate Japan to start reinvesting back home, it will be all but impossible to generate the kind of growth that Japan needs to pay for its gaping budget deficits, pensions for the elderly and much needed improvements in health care and education.
The new government's economic-policy platform offers little hope. There is nothing in the DPJ's campaign manifesto that seeks to encourage risk taking or incentivize entrepreneurs. Further, Mr. Hatoyama has so far shown little interest in boosting the competitiveness of the national economy. Quite the opposite: The cost of doing business is poised to rise, not just because of proposed changes to labor laws but also because of more stringent rules and regulations proposed across many industries.
Of course, the new cabinet deserves the benefit of the doubt. The DPJ is in power for the first time. No doubt after a while, their economic policy will find its footing. At the same time, however, the enormous landslide victory and parliamentary supermajority offer a real opportunity to implement real change. Unfortunately the list of new cabinet members suggests Tokyo will see lively debates, but little substantial action.