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VIEWPOINT: KAUTILYA
Land
Of The Setting Sun
After a decade of growth recession, is Japan headed
for growth depression also?
By Jairam Ramesh
Given its
spectacular growth performance
in the past, it appears blasphemous to even contemplate the title of a
new book by Michael Porter of the Harvard Business School Can Japan Compete?
Or of Murray Sayle's recent piece in the London Review of Books, "Japan
Goes Dutch". But it is a sign of how steep the recent decline of
the Land of the Rising Sun has been that the unthinkable has now become
commonplace with Porter and
Sayle being the latest entrants to a growing list of those trying to understand
why and how the world's biggest savings and creditor economy has collapsed.
 There
was, of course, a time when Japan could do nothing wrong. The 1970s and
1980s saw scholarly encomiums like Ezra Vogel's Japan as Number One (1979)
and Chalmers Johnson's MITI and the Japanese Miracle (1982). Japan, we
were told, had invented a vastly superior form of state-managed capitalism.
Or so it seemed from its record. Between 1950 and 1973, Japan's national
income or gross domestic product (GDP) grew at a fantastic real (inflation-adjusted)
annual average compound growth rate of 9.3 per cent. In less than three
decades, Japan had become the world's second-largest economy.
But the Japanese growth engine sputtered in
the 1980s when real GDP growth averaged just about 4 per cent annually.
The 1990s were even worse when real GDP growth averaged around 1.2 per
cent annually. The unemployment rate is now knocking at 5 per cent and
bankruptcies are surfacing. Successive governments have tried everything
by way of remedies. Short-term interest rates are close to zero but there
has been little effect on investment. Almost $1,500 billion worth of public
spending programmes, tax cuts, bank bailouts and government loans have
failed to have any effect. These have only succeeded in boosting the government's
gross debt which now stands at a whopping
140 per cent of GDP, the highest in the world and over twice America's
level.
What went wrong? Paul Krugman in his The Return
of Depression Economics (1999) and now Porter identify three main reasons
for Japan's continuing misery.
The speculative bubble of 1985-1990, which saw
the trebling of land and stock prices and whose bursting caused a decline
in investment and consumption;
A sick banking sector which now holds almost
$600 billion of problem loans on its books and that, as a result, has
caused a "liquidity trap"-that is, no credit;
Over-regulation, overprotection and lack of
competition in a number of domestic sectors like agriculture, construction,
housing, retailing, wholeselling, financial services, health care, energy,
telecommunications and logistics.
Sayle likens Japan's affliction to the success
and failure of the modern world's first miracle economy-that of the Dutch
Republic between 1588 and 1795-saying that all economic booms contain
the seeds of stagnation. Krugman calls Japan's condition one of "growth
recession" giving way to "growth depression". There is
growth all right, but not enough of it. Since it is mired in long-term
deflation-that is, when all inflation-adjusted prices are tumbling-Krugman
wants Japan to print more money to generate expectations of a mild inflation
that would make savings less attractive and borrowing more so. It would
also weaken the yen and make Japanese goods more competitive. But given
the deficit of around 10 per cent of GDP and its huge debt stock, Japan
has been reluctant to follow this route.
While Krugman seeks salvation in macroeconomic
policy, Porter's focus is on microeconomics. He debunks the conventional
wisdom on the role of government in Japan's competitive success by studying
areas where that country failed to acquire global pre-eminence. He calls
for redesigning the role
of government and sees the emergence of a new Japanese company radically
different from the earlier generation of Toyotas, Hitachis and Mitsubishis.
From among that generation, Sony and Honda fit the Porter paradigm of
competitiveness in the changing context of Japan. New names like Nidec,
Rohm, Kyoden, Shimono, Orix, Softbank, Pasona, Rakuten and NetAge represent
the new breed that can bail Japan out.
To compound its economic woes, Japan faces a
severe demographic shock. Its population is expected to decline from
127 million now to around a 100 million in the next 50 years. With half
of Japan's women under 30 now single, Sayle points out that greenfield
household formation, once the engine of Japan's miraculous growth has
practically ceased. Quite clearly, the chrysanthemum has begun to wilt
in more respects than one. This will not be without its impact on the
rest of the world. How Japan responds to this social challenge will be
more critical than mere economic policy changes.
(The author
is with the Congress party. These are his personal views.)
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