Japanese Woes


News that the Japanese stock market fell by five per cent yesterday came hard on the heels of the government's decision to let the country's tenth largest bank close. The fall was triggered by reports (later firmly denied) that the prime minister, Mr Ryutaro Hashimoto, said public money would be used to support the banking system. Market sentiment clearly favours a more robust approach, giving high priority to restructuring the Japanese financial system. This would be in keeping with Mr Hashimoto's ambitious reform programme, which emphasises deregulation and reforms in the country's fiscal, bureaucratic, social welfare and educational systems to prepare for a more open, ageing and smaller population in the decades to come. Mr Hashimoto has just been re-elected to a second and final term as prime minister. It is very much in his interest to pursue this reform programme vigorously if he is to make his mark on Japanese politics and turn around the country's economic performance. But already the established special interest groups have asserted themselves against elements of his programme, for example in the restructuring and privatisation of the post office. He has shown himself to be just as much their creature as their master in accepting compromises which substantially dilute the original force of what he has proposed.

The same applies to the proposals on bank reform. They have been subject to procrastination and fudge, ahead of the crisis of the last few days, which has been driven precisely by such uncertainties in public policy. The problem arises from the myriad questions thrown up by the collapse of Japan's bubble economy seven years ago, including the failure to address the issue of non-performing loans. This has caused stock prices to fall, affected confidence and contributed to an increasingly recessionary mood. Japan's economy remains very sluggish, which may propel Mr Hashimoto in the direction of a pump-priming exercise. Whatever about that, he would be well-advised not to channel public money towards the banking system, but rather towards stimulating overall demand by public works projects. A programme adopted this week contributes to that objective. But it is timid and modest compared to what is required. Other elements of the reform package include proposals to lower corporate taxes, which would discourage investment abroad and encourage funds to remain at home where jobs are needed. Whether this is sufficient remains to be seen, given the clear preference of many large Japanese companies to invest abroad, especially in Asia, where costs and profit opportunities are much more favourable to them than in what they regard as an over-regulated home market. The coincidence of Japan's economic troubles with those in South Korea over recent days raises a much more troubling scenario - that the financial and market turbulence which has afflicted south-east Asia will spread to these, the region's economic epicentres. If it does, the consequences will be worldwide, not restricted to emergent markets but substantially affecting global ones. All the more reason to be aware of the details of Japan's reform programme. And all the more urgent that its leaders should assume much more responsibility for the economic and financial well-being of its region, rather than concentrating solely on its own domestic woes.