Japan – A Flailing Economy

japan.jpgJapan is the second biggest economy in the world and if we are worried about the slow down and the crises cropping up in the financial markets of the United States of America, then Japan also demands similar if not equal attention. There are a lot of similarities in the two economies and lessons can be learnt by the ways in which the two economies have reacted to similar problems and in what stead they have emerged out of the crises.

In America, the government can be blamed for not keeping a careful watch on its vast economy but it has reacted aggressively to the bust and has provided the financial stimulus expected of it. In Japan, the government was complicit as the watchdog for the economy as well as clearing up the mess for years thereafter. Most of this can be attributed to the bureaucracy of Japan. Bureaucratic blunders have cost the economy dearly and a swathe of reforms for trade and economy are direly needed. Productivity is very low and the return on investments is nearly half of that in America. Consumption is falling due to lack in increase in wages on the part of corporate companies. A ray of hope beckoned in 2001 when Mr. Junichiro Koizumi was elected as the Prime Minister. Although he was from the Liberal Democratic Party, which has been in power for almost half of the past century, he reformed the way in which his party worked and the results came in the form of the economic growth of Japan.

However, it is saddening to see the economy receding to its earlier position which the Economics Times pityingly described it as “Japan’s amazing ability to disappoint”. The stock market has plummeted and has been in for open rout all of 2008. In January, foreign investors pulled out record amounts of money out of the Japanese stock market. Economists at Goldman Sachs had said in late January that the economy was already in recession. To provide negative stimulus, the political stability of the country is in jeopardy since last summer. The turn around in politics has left a scar on the face of Japan and foreign investors are highly skeptical regarding the financial environment and profitability as the politicians themselves are thought to be indecisive. Waves of despair are doing the rounds among the politicians. The admission from the Economy Minister that Japan no longer holds the “top-tier” economy position comes as a clear signal of the grey clouds hovering over the Japanese economy. Moreover, Japan’s population is greying rather fast with one-fifth of the population already above 65 years of age. With replacement rate at 1.32, the population is falling. The productivity of the operations of the companies is also very low. Low interest rates and an environment in which the managers are scarcely accountable to share holders are the reasons for the productivity to be almost half of that of the American companies.

The growth which stemmed from the reforms starting in 2001 was primarily export led and low interest rates and low wages were kept so as to pull the companies out of the mess. It worked and Japan started growing at a respectable rate of 2 per cent per year. However, as external shocks have reached the Japanese shores with increasing oil prices and yen soaring high due to financial market instability, the internal economy cannot come to aid and act as buffer. The low interest rates were beneficial to companies but bad for savers. Same goes for the low wages which has led to a fall in consumption due to a fall in income of the workers. It was all well for the companies to get over the mess of the 1990s and make profits thereafter but as the benefits were not passed on to the workers, the internal economy is now weak and cannot act as the buffer against external shocks. A host of reforms are needed if the Japanese economy has to recover. In face of political instability and power plays, the people of Japan should get a chance to vote the party they think can best handle the situation and has the grit to bring about reforms. As a Japanese politician put it crisply as a reply to the line by Economics Times “Japan’s amazing capability to disappoint its people” cannot be better justified than today.

Himadri Agarwal

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