Home The Washington Diplomat November 2008 Japan Confronts Economic Crisis To Prevent Another ‘Lost Decade’

Japan Confronts Economic Crisis To Prevent Another ‘Lost Decade’


As nervous investors begin a frantic selling spree, everyone looks on helplessly as stocks — and billions in paper wealth — plunge uncontrollably, spreading like wildfire to other markets and threatening what had moments ago been considered a stable, even roaring economic engine.

Only, this wasn’t just the scene recently on Wall Street. It also took place half a world away in the world’s second largest econ-omy, Japan — and it didn’t just happen this past September. For Japan, it was a painful reminder of September 1990, when the Nikkei stock index nosedived nearly 20 percent in just one month, sapping consumer confidence, decimating real estate values and ushering in a period of economic stagnation that become known as Japan’s “lost decade.”

Today, as stocks around the world continue their unpredictable ride — plummeting, rebounding, then sliding again — govern-ments from Asia to the Americas are grappling with the prospect of a worldwide financial recession that at the very least has put a chink in the armor of globalization and capitalization.

Many economists are also turning their attention to Japan to learn from its draining decade-long recession — and extract lessons for how it was able to re-emerge, albeit 10 years later. (In fact, Federal Reserve Chairman Ben Bernanke is an expert on Japan’s lost decade.)

Today, of course, Japan hasn’t been immune to the global downturn. On Oct. 10, the Nikkei was battered along with stock mar-kets in Europe, Asia and North America, suffering a historic one-day loss that rivaled the Black Monday market crash of October 1987. In just five days, the Nikkei lost almost a quarter of its value before regaining substantial ground the following week.

But long-term forecasts show that Japan’s contracting economy is almost certain to fall into recession again, as exports, especially car sales to the United States, take a hit. At the same time, the country — with a gross domestic product of .3 trillion — is also somewhat insulated thanks to massive amounts of cash reserves. Thus Japan’s economy is both intimately tied to, and distinctly different from that of the United States, where toxic mortgages and over-reliance on credit have fueled the financial hemorrhaging.

Yet one common thread all countries share in this global credit crunch is panic, or rather the psychology of panic — as Ichiro Fujisaki, Japan’s new envoy in Washington, explained during a recent interview with The Washington Diplomat.

“What counts is psychology, market psychology,” he says. “If people think that tomorrow is worse than today, people will try to hold onto cash and try not to invest nor to consume, and if everyone thinks this way that would really slow down the economy.”

He may have a point. On Oct. 14, the day we spoke to Fujisaki in his elegant office at Japan’s embassy along Massachusetts Avenue, the Nikkei did a dramatic turnaround, surging to its largest-ever percentage gain in a single day (up 14 percent) on the tail end of an impressive global rally. In fact, it was so chaotic that trading had to be suspended not because of sell-offs but from too much buying, with investors clamoring to grab shares of Mitsubishi UFJ Financial Group, the Japanese banking powerhouse that sealed its billion purchase of a 21 percent stake in Morgan Stanley.

But just as quickly as stocks soared on Oct. 14 and 15, they tumbled right back down by the end of the week, with the Nikkei skidding another 11 percent. Still, the ambassador — echoing President Bush and other world leaders — urges calm in the face of such volatile swings, along with a careful assessment of where exactly we stand.

“First, what is important is you have to identify very clearly the assets and also debts of individual companies and banks. Second disclose them, and third, where necessary, solicit either public and private money to fill the gap. What is important is to recover confidence,” Fujisaki says. “We have to have a very clear view of what the situation is. This is very important because leverage is now quite high,” he adds, referring to the amount of debt used to finance a firm’s assets, “so it’s important to identify how much is the real asset.”

Fujisaki — who served as Japan’s chief negotiator for free trade agreements from 2002 to 2005 — also says we need to put things into perspective, citing the widespread benefits that globalization and free markets have brought since World War II. As such, he hopes governments will not adopt isolationist policies that erode a post-war global trading regime “that has been working for 50 years.”

Although he advocates patience, Fujisaki praises the U.S. government’s “quick response and concerted action” with other gov-ernments to stem the financial meltdown, noting that the rapid injection of public funds will be key to shoring up the faltering economy.

To that end, many in Japan cheered the U.S. government’s 0 billion bailout package, especially the 0 billion in taxpayer money that will be directly funneled into private banks, partly nationalizing them. Likewise, the Japanese government is also tapping public funds to bolster ailing financial institutions.

According to the ambassador, the government is spending about 0 billion to strengthen the economy, which includes buying underperforming loans and a 0 billion infusion of public funds. Although details of a broader spending package are still being ironed out, Japan’s prime minister has vowed to revive the financial sector with a combination of tax cuts and increased government spending, while the Bank of Japan has also pledged it would provide as much liquidity to banks as needed to stabilize the markets.

The current urgency stands in sharp contrast to the restraint of 1990, when the government was criticized for failing to take de-cisive action against Japan’s “lost decade.”

Economists say the delay resulted in a drawn-out recession that strangled economic growth, wiped out billions in wealth, and dried up capital for businesses, stymieing innovation — even the suicide rate spiked. Yet experts also point out that those tough times weren’t so tough for most average Japanese, with unemployment peaking at only 5.5 percent. And despite the Nikkei’s crushing losses, Japan remained the world’s second largest economy, so there could have been some merit in the government’s steady, tempered voice.

But the ambassador cautions against drawing too many parallels because the situation today is so much more complicated and interconnected than what Japan endured in the 1990s. Indeed, at the time Japan’s crisis was confined to its borders, and the country had the rest of the world, including consumer-hungry markets in China and the U.S., to cushion the blow.

“The Japanese economy was the Japanese economy, but the U.S. economy is not only the U.S. economy — it’s a world economy,” Fujisaki says, and as such, he agrees the Bush administration needed to take immediate measures to prevent other economies from collapsing.

Those measures also help Japan, whose export-driven economy is highly dependent on the United States, especially for car sales. In fact, Japan posted a rare trade deficit in August, with Toyota, Honda and Nissan all reporting slumping sales to the United States. Fujisaki notes that the government has limited influence over large private industries, focusing its efforts instead on small- and mid-size companies.

He does point out that in general, Tokyo has tried to wean itself away from heavily exporting goods to boosting foreign invest-ment. “For example, about 15 years ago, 70 percent of trade deficit the United States had was coming from Japan. Now, it’s down to 10 percent. Why? Because we are investing more and now we are the number two investor to this country next to only the U.K.”

On the flip side, Japan’s investment in Amer-ican companies has made it vulnerable to fluctuations in the U.S. economy, although most Japanese banks, awash in reserves, are still snatching up Wall Street holdings, as evidenced by the recent Mitsubishi-Morgan Stanley deal.

That gets to a fundamental difference between the U.S. and Japanese economies: cash — Japan is flush with it. Banks sit on large piles of reserves — with more than trillion in personal assets on deposit — Japan’s Finance Ministry and central bank control about 0 billion in foreign exchange reserves, and money is widely available for borrowing at interest rates below 1 percent.

Indeed, whereas American consumers racked up debt while putting away little or nothing in savings, the Japanese maintained one of the highest savings rates in the world, even during the country’s lost decade. Back then, home values tumbled some 60 percent, but today, the Japanese books are clear of the bad home loans that are bogging down their U.S. counterparts. And with the exception of Yamato Life Insurance Co. — which recently filed bankruptcy after becoming entangled in the U.S. subprime mortgage debacle — Tokyo has largely avoided the bundled mortgage-backed securities that poisoned European and other in-ternational investments.

Nevertheless, Japan’s enormous cash holdings have conversely led to other problems. Corporations tend to hoard money and are reluctant to borrow, and the residual effects of the lost decade can still be seen in the country’s staggering debt burden, which, at 182 percent of gross domestic product, is the highest in the developing world.

Fujisaki concedes that the national debt is unsustainable and says the government had been trying to restore fiscal balance by 2011, although that could be put on the backburner until the current financial mess is sorted out. In the meantime, he proposes that Japan and the United States learn from each other’s mistakes and successes, combining their best economic practices.

“In some countries, they cling onto not high-risk, high-return but low-risk, low-return type of psychology,” he says. “Japanese consumers hold on more to cash rather than to stocks, whereas here you try to securitize bonds, buy stocks and try to expand economic opportunity.

“I think in the long run there will be a merger of psychologies.”

Some of that may already be happening as Japan follows the U.S. lead on bailouts. Although Japanese Prime Minister Taro Aso recently made a rare high-level criticism that the Bush administration’s 0 billion bailout plan might not be enough to stabilize the shaky economy, for the most part his government has supported the banking buyouts initiated by Washington, also offering to contribute to a global bailout package for developing countries.

For his part, Aso is working to craft his own emergency spending package, which may include investment tax credits to stimulate private borrowing, loans to small- and mid-size businesses, public works projects and other spending incentives to spur the economy.

The Japanese parliament, or Diet, approved a .9 billion stimulus plan that was originally introduced before October’s market crash, although Aso is still hammering out a larger spending package. The ambassador declined to offer specifics on the proposal, but either way it’s clear Aso faces an uphill political battle.

Aso, 68, is the latest in a revolving door of Japanese prime ministers — the third in just over two years — having assumed power in late September at the very outset of the financial uproar. A blue-blooded stalwart of the conservative Liberal Democratic Party (LDP), which has dominated Japanese politics since the 1950s, he’ll have to break the logjam that has virtually paralyzed parliament since the Democratic Party of Japan (DPJ) won control of the upper chamber in 2007.

To that end, Aso is expected to call national elections as early as this month to galvanize support for his party, although so far he’s delayed the announcement amid the economic turmoil. Regardless, polls paint a bleak outlook for either side. According to a survey by the Yomiuri Shimbun newspaper, almost 80 percent of voters are equally dissatisfied by both parties, with about 32 percent planning to vote for the LDP compared to about 25 percent for the Democrats — while nearly 36 percent remain unde-cided.

Fujisaki, a career diplomat, acknowledges the frustration of a public that propelled the DPJ to a historic victory last year. “It’s true that there are people [who want] change, and at the same time there’s people who think we should leave things in the hands of experienced people, so it is between these two different types of psychologies — like here in the U.S., people want change but want some type of assurance as well.”

But the ambassador stresses that unlike the United States, Japan does not have a divided government in the sense of a Democ-ratically controlled Congress and Republican-occupied White House.

That’s because Aso’s LDP conservatives still control the influential lower house of parliament, which selects prime ministers and passes all treaties and budgets, the ambassador explained. In addition, although the prime minister doesn’t have veto power, if the upper house rejects legislation, the lower house can override that rejection with a two-thirds majority, which the LDP has.

“But you cannot use that power so often, and this is why a lot of previous prime ministers have been stalled with what they wanted to do,” Fujisaki says.

Although the ruling party doesn’t want to abuse its two-thirds-majority veto, the ambassador warns it will do just that when it comes to a controversial issue with major implications for U.S.-Japanese relations.

The lower house is debating whether to extend Japan’s free refueling operations in the Indian Ocean for NATO operations in Afghanistan. It’s the pacifist nation’s main contribution to the fight against the Taliban and a priority of the Aso administration, although it remains a contentious issue for the opposition party.

“It’s unthinkable that Japan would become a sole nation to withdraw from this region when other nations are providing more troops to the war against terrorism,” Aso recently told a lower house committee.

Fujisaki agrees, and though he hopes the two sides can come to an agreement, he’s clear on the importance of the mission to Aso. “I think fighting terrorism is not only a U.S. issue,” he says. “If worse comes to worse, the prime minister is determined to use the two-thirds option. He is determined.”

It’s an uncharacteristically blunt admission from a normally reserved veteran of Japan’s Foreign Service, who previously served as ambassador and permanent representative to the International Organizations in Geneva and as Japan’s deputy minister for foreign affairs.

The amiable diplomat was also the director-general of the North American Affairs Bureau at the Ministry of Foreign Affairs, which he joined in 1969, and this marks his second posting in Washington, D.C., having served here as a political counselor in the late 1990s.

Although he has nothing but kind words for Washington, Fujisaki carefully sidestepped a question on whether the recent U.S. decision to remove North Korea from its list of state sponsors of terrorism would damage ties with Japan. The move was widely hailed as an important step in the six-party talks over North Korea’s nuclear program, but in Japan, it was promptly condemned by the families of Japanese citizens kidnapped by the North in the 1970s and 1980s. The issue of the missing abductees strikes an emotional chord with the Japanese, who worry their cases will be cast aside in the Bush administration’s pursuit of denu-clearization.

Japanese officials often struggle to explain why this singular incident, involving a handful of people, colors Japan’s entire dealings with the reclusive North, but the ambassador framed it this way: “If you imagine that American girls or boys were clearly abducted by some other country and if they refused to return them … would the people really let the American government extend cooperation to that country?”

Fujisaki also pointed out that Japan’s concerns go beyond the nuclear realm, because even a short-range missile launched from the North’s shores could reach mainland Japan.

The quintessential diplomat demurred though on the impact of Bush’s decision to take Kim Jong-il’s regime off the U.S. terror-ism blacklist, saying simply that he is confident Bush “understands the importance of this issue” and that “we have to be very careful in dealing with North Korea and we have to really nail them down to their commitments.”

Although mild-mannered, Fujisaki becomes quite animated when he whips out a set of graphs and pie charts that illustrate Japan’s contribution to the world — part of a two-minute presentation he gives to Congress, universities and other American audiences. For instance, on the environment, although Japan is the second largest economy in the world, it contributes roughly 4 percent of global greenhouse gas emissions, well behind the United States, China, all of the European Union nations and Russia.

Japan stands second though in total U.N. development aid over the past 10 years, far surpassing Britain, France, Russia and China combined. Likewise, it ranks second and third in reconstruction assistance to Iraq and Afghanistan, respectively — a sign, the ambassador says, that Japan is hardly “inward-looking.”

But one demographic Japan is eyeing very carefully is its aging population. In fact, the country is heading into the world’s worst demographic catastrophe, with the elderly expected to outnumber children 4 to 1 by 2040 — a disproportion that by 2050 will strip Japan of 70 percent of its workforce. Fujisaki says that although “there is nothing wrong about people over 65 — I am approaching that age — for a society it is not healthy.” To that end, the government has embarked on improving working and family conditions for women to encourage them to have more children, but the ambassador admits “this is biggest issue facing Japan in the future.”

In the meantime though, for most Japanese, whether young or old, their most pressing worry is the economy. Fujisaki expresses cautious optimism that the world is addressing what needs to be done to alleviate those worries.

“Because it is so serious all the governments and central banks around the world are trying to cooperate and get out of this situation, and not only the governments and central banks but the private companies as well,” he says. “We hope we can get out of this situation quickly and that … the effect to the real economy would be as small as possible — this is the key element.”

About the Author

Anna Gawel is managing editor of The Washington Diplomat and news columnist for the Diplomatic Pouch.