Japan’s vast confidence that its companies had perfected the route to the future lingered for years after 1992, when the Great Bubble burst. While an investment analyst for Kleinwort Benson as-was, on a mission to Tokyo to recommend British printing and media stocks, I remember standing at the hotel window, 20 or so floors up, looking across the skyline at the neon logos of the world-beating giants of Japanese industry and seriously considering getting straight back on the plane home.
Any recommendation I made would be humiliating and futile, I reckoned, and that forecast, at least, I got right. After I’d inched through the advocacy of each stock, each argument painfully translated to the table of two dozen immobile black suits, one of the younger fund managers, in faultless and rapid English, would explain why Japanese stocks seemed a better bet.
To say that confidence is long gone is an understatement. In nuanced, self-deprecating analysis, with considerable charm, politicians, bankers and academics will lay out for you why Japan’s “lost decade” after 1992 turned into two lost decades and why they fear their country may never recover its growth. That case, compelling in theory, is underpinned by the powerful sense of a society stuck in the glory days of 30 or 40 years ago. Car and steel factories, those quintessential 1980s industries, are still the dominant features of the commercial landscape; parliamentarians’ offices are stuffed with paper and campaign mementoes but hardly any screens; universities lack rudimentary technical equipment; and entrepreneurial conversation is absent.
It’s hard to answer “yes” to the question: “Are they going to make it?” Despite the election of the Democratic Party in August, overturning decades of Liberal Democrat rule, the prospect looks like one of small adjustments that head off overwhelming disaster, while surrendering markets and influence to China.
“Even more than economics, we have lost two decades of politics,” Akira Kojima, of the Japan Centre for Economic Research, said. What went wrong? Decades of export-led growth made Japan one of the world’s richest countries. But productivity growth fell steadily in the 1980s and Japanese companies lost ground to the low-wage economies of South Korea and Vietnam. Demand at home never took up the slack. The puncturing of the debt-fuelled asset bubble, in a shower of petals from overpriced Van Gogh flowers, exposed the “zombie banks” and their meaningless balance sheets. Two decades cleared some of the debris but not all of the bureaucrat culture that encouraged it. Most painful, the 1992 start of Japan’s paralysis coincided with Deng Xiaoping’s opening of China’s economy. “While we were in hospital, China and India woke up,” said one official.
One lesson — which many now invoke about Greece — is the urgency of acting against deflation. Falling prices make life comfortable for those in work but choke off desire to spend. Takahide Kiuchi, the chief economist of Nomura Securities, argues that had the Bank of Japan taken more aggressive action early in the 1990s, it might have helped, “but at that time, no one knew how risky deflation was, how dangerous”.
That still-unwon battle is not the only problem. Central and local government debt together are nearly 180 per cent of gross domestic product. About 45 per cent of government spending this year will be financed by new borrowing. By 2030, one third of the population will be aged 65 or over, reducing tax revenues and boosting healthcare costs. China has come booming out of the global crisis of the past two years but Japan has been the hardest hit of the Organisation for Economic Co-operation and Development countries. There is an optimistic path through these numbers, says Mr Kiuchi. It begins with the well-known point that 95 per cent of government debt is financed by Japanese savings, making the Government largely independent of the markets, in contrast with Greece. Yes, the savings rate will fall as the population ages, but if more of Japan’s highly educated women entered the workforce it would compensate for baby boomers leaving it. The shrinking population, and a recent law weakening tenants’ rights, will free up housing, allowing younger people to get homes sooner. That will help to boost consumption. Meanwhile, the region’s growth will lift exports.
But each step of such optimism depends on huge change. Many have looked to Japan’s women as the salvation but that depends on not only a change of culture but far more childcare. Many countries have found immigrants a cheap source of such help but Japan is only just, through overtures to Japanese communities in Latin America, considering that. True, China’s worries about inflation may cause it to allow the currency to rise, but those who pin hopes of exports on Beijing’s currency policy, as Washington could tell Tokyo, can have a long wait. Most immediate, the new Government seems unable to trim the deficit in the Budget making its way through parliament, given corruption scandals and a rash of expensive populist promises before the July elections for the upper house.
“This is a very poor budget,” said Professor Kojima, “focused only on the election.”
Atsushi Makajima, the chief economist of the Mizuho Research Institute, complained, too, that the Budget “does nothing for the corporate sector” — not cut taxes, nor deregulate the stifled service sector, nor make it easier to raise capital.
The lack of a risk-taking business culture, often noted, can be overstated. The technical confidence — taken for granted, as a kind of literacy — among those buying electronic components off market stalls is impressive. The disdain of those in their late 50s and 60s for the younger generation’s lack of stamina for long hours or “building Japan” is unjustified and misses the point of what originality in business would look like. But still, the lack of drive to exploit ideas abroad that have done well at home is striking. A bewilderment about how to compete runs through one recent very public lament: Japan’s loss, to South Korea, of a nuclear power contract with the United Arab Emirates. Many ascribed the failure to “too much competition” among private sector suppliers.
In the US and Europe, foreign policy officials are often gloomy, seeing threats everywhere, but financiers are more cheerfully pragmatic, reckoning that in the uncertainty they can make money. In Japan, it is the reverse. The foreign policy advisers are confident of Japan’s influence, born of a still astounding level of affluence by the region’s standards and of their ability to tell China to its face when it needs to change. But the economists are gloomy, finding few signs of the capacity for reform that the arithmetic says is necessary.
This is not a prescription for immediate disaster but for growing discomfort. “There is not complacency now,” said Professor Kojima, “but nor is there is enough sense of crisis to bring about the conditions for change.” In what counts for optimism these days in Japan, he added, drily: “But at least we are in the process of creating one.”