A tale of two crises

JAPAN:Where do the comparisons between Japan's slump in the 1990s and Ireland's present difficulties helpfully begin and end, asks DAVID MCNEILL

TWO ECONOMIES over-stimulate on a diet of cheap capital, fuelling a dizzying property and land bubble and a painful crash, dominated by deep anxieties about banking health.

There, perhaps, the comparisons between Japan and Ireland end. After all, the Asian giant’s $5-trillion economy is about 18 times the size of the Republic’s and most of its still mighty manufacturing sector is entirely Japanese.

Still, there are interesting similarities. Japan’s political landscape, for example, was dominated for decades by a conservative business-friendly party long criticised for corrupt links to the construction industry – until it was dumped from power by an angry electorate last year. Sound familiar?

For two years since the Celtic Tiger began its vertiginous journey south, Japan-based analysts have had one piece of consistent advice: recapitalise the banking sector quickly. Japan took over a decade to scrub non-performing loans from the banks’ balance sheets, draining the economy of vitality and plunging the country into a long deflationary spiral.

“Japan had economic resources that allowed it to muddle through, especially large private savings and financial assets owned by households,” says Kiichi Murashima, chief economist at City Group Tokyo. “Ireland doesn’t have that luxury.”

The problem, now that the Irish Government has grasped the banking nettle, is that “solving the debt issue may be beyond what it can pay politically”. Murashima is among many here to conclude that the Cowen administration will fall soon, and the backlash could take extreme forms: strikes, protests or worse.

Some observers here are very critical, however, of the Irish Government’s slash-and-burn tactics, contrasting them to the approach taken by Japan since its banking crisis hit: huge government spending. Since the 1990s, Japanese governments have passed a series of stimulus packages, culminating in the latest last month (November), when it green-lighted about $61 billion in extra spending to prevent the economy from sliding into recession. Last December, parliament authorised an eye-watering 7.2 trillion-yen splurge ($81 billion at last year’s exchange rates), one-third of Ireland’s entire GDP.

Those packages have been controversial and left Japan with a mountain of public debt – roughly 200 per cent of GDP. Many economists argue that the result has been to postpone root-and-branch reform of Japan’s structural problems.

But without them, Japan’s slump would have been far, far worse, argues Gregory Clark, director of Akita International University and commentator for the Japan Times. “Of course stimulus involves debt. But, done properly, it also creates growth. The growth produces tax revenues that can more than balance the debt.”

He says austerity measures, by contrast, threaten to throw the entire economy into Japan-style deflation, “cutting the incentive later to respond to belated stimulus spending, which also increases the deficit”.

Stimulus packages may be “postponing the pain”, says Irishman Rene Duignan, an economist at Temple University Japan in Tokyo, monitoring Asian economies. “But in Ireland’s case, they went straight into cutting, which suppressed demand very quickly and made the problem worse. It’s punishing people, not the banks.”

Ireland at least avoided the mistake of bankrupting its banks, says Clark. “But like Iceland it should have seized the opportunity to nationalise them quickly. Japan did that to some extent, but very messily. In the process it created more bad loans, and more bank trauma.”

All well and good, some will argue, but the contexts are very different. As Murashima points out, 95 per cent of Japan’s debt is owned by the Japanese in contrast to the Republic, which is now deep in hock to Europe and was under pressure from markets that in Duignan’s words “smelled blood”. Japan has built up a cushion of vast reserves of foreign currency and personal savings – and it controls its own currency, giving it a vital fiscal lever that Ireland no longer has.

So Ireland’s options are more limited, or at least more confrontational: Force the problems back onto those who loaned money to the Irish banks – “mainly fat cat foreigners” and their local partners who fumbled in the greasy till, says Clark. It might even involve hiking the corporate tax rate well past 12.5 per cent, pulling out of the euro harness and reclaiming the levers of the economy.

That medicine is too rich for Frank Sanda, a former chief executive of Apple Computer Japan and founder of telecommunications firm Japan Communication Inc. He has a 40-year interest in Ireland, having been involved in Dublin in the Smithfield area redevelopment.

“I’m encouraged by the budget cuts, he says. “Of course everybody is pissed off, but the result is that you’ll have broader support when the government does put something together.” He believes Ireland is still not properly leveraging its key assets. “This is the only other English-speaking country in Europe, and the other country is not a member of the euro,” he points out.

The success of the Celtic economy was, he believes, built on its “intellectual workforce” and farsighted infrastructural investment.

“Ireland brought fiber-optic links from America before any other country, and that’s important, because the next generation of economic growth is going to be information and intellect-based. We can’t compete against need-based manufacturing economies like China and India; we have to find other roads.”

Entrepreneurs like Sanda advise Ireland to stay in the euro and maintain the deregulated business and technological environment that has attracted about 400 multinationals. Developing Ireland’s intellectual assets won’t be easy. Experts warn that 100,000 skilled workers could emigrate in the next three years. But there are encouraging signs. Several start-ups, including wireless internet provider Bitbuzz and online polling company Polldaddy, have clung on and thrived. More may be in the pipeline, with Enterprise Ireland recently announcing the start of an €85-million fund for high-tech firms.

If Ireland can keep its young population at home and incubate the economy’s new growth industries, then it can recover, says the director of Enterprise Ireland’s Tokyo office, Eddie Hughes.

“Japan has a shrinking and ageing population while Ireland has a young and growing population. The Japanese economy may actually worsen because of the significant demographic changes facing Japan if the current trend continues.”

Also, Ireland has a much more open economy than Japan. “In terms of increasing competitiveness and productivity, Ireland is much more attractive for FDI and entrepreneurship – a fact not lost on industry commentators here who feel the Japanese government has to make the environment and incentives in Japan much more attractive to investors.”

The experts speak

Eamonn Fingleton, Donegal-born, Tokyo-based economist and author of In the Jaws of the Dragon

If there is a lesson in Japan’s story it is this: Japan at all times has kept its eye on Number One: trade. The result is that even last year – probably the worst year for the world economy since the 1930s – Japan earned a current account surplus of $142 billion, equal to 2.8 per cent of GDP. Ireland’s position was a current account deficit last year of $6.7 billion – equal to 3 per cent of GDP. Ireland built its prosperity on its success in exporting. During its bubble years it came unwisely to believe that trade did not matter. It is time Ireland rediscovered the relevance of trade for the nation’s long-term prosperity.

Eddie Hughes, director of Enterprise Ireland in Tokyo

“Incubate new companies. Entrepreneurial start-ups in Japan post-1996 created about 1.2 million jobs and were one of the largest contributors to job creation and growth. Certainly, in the last decade or so, Ireland has established an excellent track record in start-ups and we recognize their importance in building jobs in the economy. In terms of lessons/ideas from the market, some of the key emerging opportunities for Irish businesses in Japan appear to be in food and beverages(eg active ageing products and nutritional ingredients), ICT, cleantech industries, life-sciences and environmentally friendly technologies.”

Frank Sanda,founder of telecomms company Japan Communication Inc

“Make the most of your intellectual assets. The IT market is now global. Ireland no longer has to be a small fish in a big pond. It could be the best place in Europe to work in developing software and wireless networks. The next generation internet will deliver the necessary information to the individual when and where he/she needs it. The only way to do this is through the use of the wireless telecommunication network. My advice is to give regulatory freedom to wireless operators.”