Jung Kim is a Staff Writer for the Harvard International Review.
During the bubble days of the late 1980s, Japanese businessmen and bureaucrats alike proudly claimed that Japan had developed a new, advanced form of economic organization. Eisuke Sakakibara of Japan's Ministry of International Trade and Industry (MITI) even published a tome, entitled Beyond Capitalism, that supposedly demonstrated the superiority of the Japanese system. However, since then, the Japanese economy has hit upon hard times. Now, many analysts both within the government and from the private sector have reversed their positions. They see a fundamental restructuring of the Japanese economy in terms of widespread deregulation as the solution to their current economic troubles. Such deregulation will have tremendous ramifications for US trade with Japan. Though deregulation may not reduce the US trade deficit, it will significantly change the nature of trade between the two nations and allow for stronger competition.
Japan's Fall from Grace
During the years of 1991 and 1992, Japanese property and stock prices plummeted to around half their original values, and since then, the economy has been struggling. Early last year, Japan had appeared to be finally on the verge of recovery after a massive increase in government spending boosted the nation's Gross Domestic Product (GDP) by 8.4 percent in the first quarter. However, the success was short-lived as the economy shrank again in the latter half of the year. Since 1992, Japan's GDP has grown by a total of only six percent, a small figure relative to the high growth rates to which the Japanese are accustomed.
Meanwhile, hardly a day goes by without reports of the latest economic disasters. Not only has economic growth been sluggish, but Japan has also faced a series of major corporate debacles. One of the most publicized cases last year involved a copper trader at the Sumitomo corporation. This person allegedly lost US$2.6 billion through bad trading and then tried to cover up his mistakes with bad bookkeeping. Sumitomo's chairman was forced to resign as a result of this scandal. Massive corporate losses like this one weaken the Japanese economy by decreasing the amount of money that could be used for research or that could be pump-ed into the consumer economy through wages and bonuses.
However, more serious than corporate mistakes, perhaps, are the structural weaknesses in the Japanese economy. Japanese government debt, including those of the local governments, has skyrocketed in recent years as a result of both pork-barrel politics and a number of well-intentioned spending packages aimed at boosting economic growth. Furthermore, there was the costly jusen, or mortgage companies, bailout. When property prices fell, the jusen had been left with collateral that was worth much less than their original, outstanding loans. To limit their losses and keep the companies solvent, the government intervened. Though the move was costly and very unpopular, it was necessary in order to keep Japan's financial system sound. In addition to this bailout, the government also faces a staggering US$167 billion liability--an amount equivalent to US$1,300 for every Japanese citizen--from the loss-generating railway system. Expensive bullet trains, a favorite form of political pork, have been extended to remote districts in order to please local constituents. The total Japanese debt, then, is expected to reach US$3.8 trillion by the end of next year, almost equal to Japan's GDP.
The biggest threat to Japan's economic health, however, lies in its banking sector. Although the total sum of non-performing loans (NPLs)--loans that will end up in default--held by Japanese banks can only be estimated, figures gathered by the Economist in World in 1997 show that the total amount of NPLs held by Japanese banks is over US$800 billion. The latest rumors involving Nippon Credit Bank, Japan's seventeenth-largest bank, merely give a taste of things to come. …