Japan's 20-year-long lost decade

WILLIAM PESEK

October 21, 2009

The clock is ticking. Each day that passes without Japan’s officials hunkering down to boost growth, halt deflation, prepare for an aging population and increase competitiveness is a blow to the nation’s 126 million people.

December marks the 20th anniversary of the Nikkei 225 Stock Average’s bubble-years peak of 38,915. Japan’s "Lost Decade" began soon after. In some ways, it has been two decades. The first - 1990 to 2000 - was a crisis-filled one. The second, which is still playing out, has been more stable, yet not without its own perils.

Even after Japan began growing around 2002, it was only because of the economic equivalent of steroids. If you took away near-zero interest rates and massive fiscal pump-priming, growth would have fizzled. So, in a sense, Japan’s longest postwar recovery was a mirage. Japan has yet to find the exit strategy the US is now beginning to search for.

Getting a handle on political obstacles is an obvious first step toward ending Japan’s funk. The next is keeping balkanised infighting between factions from scuttling economic change. Two decades really should be long enough.

As Japanese finance ministers go, Hirohisa Fujii is setting a speed record for trashing his credibility.

Policy Dearth

Fujii’s yen policy, or lack thereof, tells the story. One day, traders think he’s fine with the yen’s 13 per cent gain versus the dollar over the last 12 months. The next, they are bracing for massive intervention in markets. Prime Minister Yukio Hatoyama’s goal of wowing investors in his first five weeks in office isn’t succeeding.

Worse, strategists already sense a kind of "balkanized gridlock" seeping into a government charged with keeping Japan relevant as China becomes more powerful. If so, investors will be no happier with Japan’s new leaders than the old ones.

"When Japan awakes this New Year’s Day, it will wake to two utterly unpalatable new realities: Its economy will have been elbowed into third place by China and the 'Lost Decade' will have expanded past the two-decade mark," says Nicholas Smith of MF Global FXA Securities in Tokyo.

Investors are counting on Smith being wrong. The trouble is, Fujii isn’t even Japan’s weakest economic link. That would be Financial Services Minister Shizuka Kamei.

Out of Control

The man is clearly out of control and Hatoyama’s inability to rein him in speaks to the factional nature of Japanese politics. It’s not the political parties that matter, so much as the competing interests under their banners. How Hatoyama’s Democratic Party of Japan ended up with an anti-reform firebrand is a case in point. Last month, his administration took over from the Liberal Democratic Party, which ruled Japan for all but 10 months since 1955.

"Many foreign investors see Kamei’s appointment as a victory for old-guard LDP hardliners," says Naomi Fink, Tokyo- based strategist at Bank of Tokyo-Mitsubishi UFJ.

Kamei has already managed to spook stock investors with a plan for a moratorium on loan repayments for small companies that would harm banks’ profitability, asset quality and risk management. He is set on halting the privatisation of Japan’s sprawling postal system to the dismay of investors awaiting its initial public offering.

Japan’s new government deserves more time to fix an economy suffering from decades of neglect. It’s also worth pointing out some early Hatoyama successes.

One is the zeal with which his team is scaling back on wasteful public-works projects such as unnecessary dams and bridges. Concrete Economics are a major reason Japan is shackled with the biggest public debt in the developed world: almost twice the size of its economy. The Democratic Party of Japan aims to channel those vast funds to more productive pursuits.

New Energy

Another is accelerating the process of pulling power away from bureaucrats and putting it in the hands of elected officials. It’s the key to reducing corruption in an economic system in dire need of new energy and dynamism.

Hatoyama also made an impression in Pittsburgh last month at the Group of 20 summit. Let’s face it, the world didn’t much care about Japan’s last three premiers. The one that people overseas may remember most out of Japan’s last 10 leaders was Junichiro Koizumi. Who can forget his 2006 air-guitar performance at Elvis Presley’s home in Memphis, Tennessee, as an amused President George W Bush looked on?

It’s this global-recognition vacuum that made Hatoyama’s US trip so significant. The Stanford University PhD even delivered a speech to the United Nations General Assembly in English -- quite a novelty. There, he spelled out Japan’s commitment to retool its economy and create an East Asian community similar to the European Union. The UN crowd isn’t accustomed to big thoughts from a Japanese leader.

The question, of course, is whether Hatoyama’s party can do more than talk about change. His economic team is proving to be a disheartening liability. Fujii’s yen flip-flops are part of the problem. The bigger one is Kamei. Time is marching on.

Bloomberg