Japan

In the doldrums, once again

Japan gives the clear impression that it does not really welcome foreign investors, writes Linda Lloyd

  A popular Japanese novel once depicted the country sinking beneath the waves and disappearing for ever. The clincher was that the rest of the world did not care and went about its business as usual.
   Not long after that, the nation’s booming economy ran out of steam and only briefly regained momentum some two years ago.
   Now Japan has hit another bad patch with the stock market in bearish mode while morale is once again in freefall, a downbeat mood which is accentuated by the poor prospects for the world economy. Share prices are where they were five years ago, which pitches them roughly at half the level of 20 years ago. If that were not bad enough the north-west region of Asia is now far more competitive than it was. And on a global scale figures from the International Monetary Fund (IMF) show gross national product (GNP) figures of $4 trillion for Japan, broadly where they were in the early part of the last decade. In contrast the European economic area has doubled to $12 trillion over the same period while the United States figures have more than doubled from $6 trillion to $14 trillion.
   What makes this bout of introspection more perverse is the combination of a much more assertive and economically competent China and a political class that has lost the stomach for reform. That toxic combination makes it hard to see how Japan can break the bad spell this time and emerge once again as one of the world’s most influential and performance-oriented economies.

  But for the moment, the bad old habits of the ruling Liberal Democratic Party (LDP) have returned and the agenda has returned to tinkering with nationalist policies which are something of a luxury at a time when China is gobbling up Japanese world markets and eating into its technological competencies.
   It is hard to recall now the era of optimism that dawned during the prime ministership of Junichiro Koizumi. With his tousled hair and love of Elvis Presley, which extended to releasing a CD of the singer’s hits, his reforming ideas were just what the country needed to get the economy moving and spark feelings of optimism among the people. He forced banks and companies to rid themselves of bad loans and reduced the influence of special interest groups that have for so long sapped government finances and energies. And for a time it seemed to work: the economy started to pick up but it took some time for people to realise just what would be the potential effects of a programme of reforms. Just as successful reformers in the West had cut back on public spending and helped to put capital to more productive use, so Koizumi’s vision began to cut into feather-bedded local budgets and the political bribes to which people had become accustomed. He also realised that Japan needed a mass of reforms to open up and stimulate the economy, with lower tariffs on imported food, freer trade, fewer subsidies, better treatment of foreign firms, abolition of subsidies for domestic businesses and greater control and discipline in budgetary matters — the national debt is now about 180 per cent of gross domestic product (GDP).
   But one Koizumi does not a spring make and the plans for a reform programme did not outlast his time in office. The LDP hierarchy had little taste for his style and method of government nor for any reforms, which by their very nature would rock the electoral boat. So once the Koizumi era came to a close the party went into retrospective mode under his successor as party president and prime minister, Shinzo Abe.
   Abe, scion of a famous political family, first gave promise of reform but in the event he had little to offer on the economic front and remained enmeshed in classic LDP nationalist themes which had little to do with decline in the rural areas, stagnating wages and lack of investment. Abe, apparently blissfully unaware of the disaster happening around him, suddenly resigned and then disappeared into hospital complaining of stress and nervous exhaustion. He left an economy in no better shape than himself. If the party had managed to stick with the reform agenda at that point the outlook might have been at least moderately optimistic but it took what amounted to a step back into the political Dark Ages by handing back control of the party to the older generation. In the brief Koizumi spring, power had started to reside where it belongs, with the prime minister and the cabinet, but it has now moved back into the smoky back rooms where the factions rule and where pork barrel interests dominate. Party policy, to all intents and purposes, is now back in the hands of the likes of former prime ministers Yoshiro Mori, aged 70, and Yasuhiro Nakasone, 89.
   Negotiations on trade barriers with other nations are now once again off the agenda along with tax reform. For civil servants formerly active in driving reform forward there is now not only no political mileage in it but pursuit of it might actually harm a career. More worryingly, opposition to foreign investment seems to be on the rise and, with the stock market looking as rocky as those in the rest of the world the outlook for the economy is grim. Takatoshi Ito of Tokyo University, who sits on the Council of Economic and Fiscal Policy, which has championed reform, says that had it gone forward the country would have been able to grow at 2 per cent a year but without it, it will struggle along with growth of as little as 1 per cent per year.
   If any further confirmation was required that the current political climate points in a retrograde direction it came from the bureaucracy and one of the most senior bureaucrats at that — the senior minister at the influential Ministry of Economy, Trade and Industry. Takao Kitabata addressed more than a hundred businessmen in January on the developing environment for Japanese businesses and the need to adjust to the far-reaching changes now transforming world business. His comment that companies should be able to choose their shareholders stunned foreign business-men and commentators along with his observation that shareholders were ‘fickle, irresponsible and greedy’. That prompted many foreign investors to consider their futures in the Japanese market since his comments seemed to confirm the feeling that Japan does not really welcome foreign investors.
   Even though foreign ownership of companies on the Tokyo Stock Exchange has now risen to 28 per cent and government policy calls for doubling the ratio of foreign investment to GDP to 5 per cent by 2010, the true sentiments of the formidable combination of businessmen, bureaucrats and politicians seem to lie with protectionism. The government has enlarged the list of companies which require review under national security regulations should foreign shareholdings rise above 10 per cent of the whole and more than 400 firms are reported by the Financial Times to have instigated ‘poison pill’ defences against the possibility of foreign takeovers. But perhaps even more disturbing as a signal that the bad old days are returning is the revelation that Nippon Steel, fearing a takeover by ArcelorMittal, has set up a ‘share ownership club’ through which other Japanese firms can buy its shares. Cross holding of shares by major Japanese companies has always been a major barrier to foreign participation in and development of the Japanese economy.
   With the rest of the world needing all the help it can get to stop the world economy spinning off down a black hole it behoves the world’s second economic power to do all it can to help keep the merry-go-round turning.
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