Is Obuchi the Answer?

Article excerpt

Keizo Obuchi, Japan's new rime minister and its sixth since the election of President Clinton in 1992, is a man who has his work cut out for him. His predecessor, Ryutaro Hashimoto, resigned unceremoniously in accepting responsibility for his Liberal Democratic Party's disastrous showing in the July 12 election for the upper house of Japan's Diet, or parliament.

The LDP has led Japan more or less continuously since World War II, except for brief periods in the late 1940s and early '90s. "Throwing the bums out of office" is an unusual response for the normally staid and placid Japanese electorate, but voters apparently were fed up with the LDP's lackluster handling of the economic malaise that has plagued Japan in the nineties.

Examples of the economic difficulties facing Japan are legion. Accustomed to average economic growth rates of 10 percent a year from the mid-1950s until the early '70s, Japan has seen growth dip to only a little over 1 percent since 1992.

What's more, Japan's economy actually shrank in fiscal year 1997 by 0.7 percent. And having experienced two consecutive quarters of negative growth in 1998, Japan is now officially in recession, its first since the oil-price shocks of the mid-1970s.

Unemployment, at 4.3 percent in June, is at the highest level since Japan began keeping statistics in 1953. Furthermore, Japan's currency, the yen, is off 60 percent against the dollar since 1995, signaling an international lack of confidence in the Japanese economy and the ability of Japan's leaders to turn things around.

Mountains of debt

Ominously, though, a mountain of bad debt is currently blighting the books of Japanese banks. The government officially estimates these bad loans at $700 billion, but they are likely closer to $1 trillion or above.

They are the legacy of the collapse of Japanese stock and real estate markets, down 60 percent and 80 percent, respectively, from 1989 highs. The upshot of this massive pile of bad loans is that the stability of Japan's entire bking system is threatened, with potentially calamitous effects for the international financial order (including the United States) should something catastrophic happen (such as the bottom dropping out of the yen).

In any event, the banking system is in urgent need of a drastic overhaul to end the "credit crunch" caused by the undercapitalized banks' unwillingness to extend further credit. The problem is, such an overhaul is a painful proposition, allowing several major banks to fail, with all the attendant social and economic dislocation that would bring. Not surprisingly, Japanese politicians of all stripes have been loath to take up this challenge.

Into the spotlight stepped Obuchi, 61, a longtime LDP functionary with no economic experience to speak of. Despite his party's drubbing in the upper house, he became prime minister by virtue of the LDP's solid control of the more powerful lower house. Now Obuchi is charged with revitalizing and restructuring the once vibrant, now moribund Japanese economy, currently caught in its seventh consecutive year of economic stagnation.

And Obuchi will not exactly have the weight of public opinion on his side. A recent poll found that fewer than 10 percent of the Japanese people wanted him as prime minister. Indeed, another poll showed that 37 percent thought he should resign immediately. Obuchi's fate, as well as that of the LDP, is intimately tied to his handling of Japan's troubled economy. …