After four years, Japan has finally emerged from a recession that dealt a serious blow to its financial system, shook consumer confidence and caused the biggest industry slow-down since the 30s. More than anything, the crisis has provided an impetus for Japanese leaders, public and private sector alike, to revamp their thinking and planning processes. Judging from the sources such as the Financial Times, the Economist, and the Far Eastern Economic Review, the general belief is that new Japan will be more cautious, less structured, and less regulation-ridden. However, while the overall feeling about Japan's future is that of optimism, most experts still see much more room for improvement in the country's reformation process. Furthermore, it seems that these reforms need to come from deep within the system that for the last 40 years espoused the traditional Japanese values of loyalty, discipline, and group ethic.

In other words, to compete in the 21st century Japan will have to drastically change the policies that resulted in its rapid success in the 1950s and 60s. To better understand what will have to be done, we need to take a brief look at the factors that influence Japan's managerial style and policies.

First are the practices of the Japanese financial system, whose downfall has been the probably the most shocking event in the past recession. Like other corporate entities in Japan, banks are a part of the industrial management machine, instructed by the Ministry of Finance (MoF) to provide cheap credit to industries and discouraged from competing with each other. Bolstered by a high domestic savings rate and strong economy, Japanese banks rose to preeminence in the 80s. In fact, six of the top 10 banks in the world today are Japanese. Prior to the Daiwa scandal, they were noted for their strong credit rating and conservatism.

However, the management style that earned them the status of powerhouses in the world financial markets was not without faults, as evidenced during the recent "jusen" fiasco. Similarly to the savings and loan scandal in the US, major Japanese banks lent money to jusens or housing-loan companies during the late 80s hoping for continued economic and housing boom. When land prices crashed in Japan, jusens were unable to pay back, creating bad loans in the excess of $925 billion. And since the banks are governed by the MoF, it seemed that the Ministry itself was heading for an unprecedented downturn and subsequent re-organization. However, the public outrage came when the government and MoF decided to bail out the jusens with $6.28 billion of taxpayer's money.

The jusen scandal has prompted many questions about the lending practices and exposure of the Japanese banks. Although all of them were forced to write-off bad debt totaling 10 trillion yen and size down their balance sheets following the jusen episode, investors and customers are still in the dark about the banks' liabilities and bed debt. Basically, the banks' sense of liability is ill-conceived and tainted by the idea that the government will always be there to bail them out in case of future scandals. In addition, the Japanese banking and securities system is highly regulated, leaving very little room for banks to develop new roles and services. Finally, given the changing nature of the Japanese business in a quest for greater competitiveness, the present state of financial management in Japan is hardly the one desired by the country's corporate entities and citizens. However, given the speed of recovery, the banks seem to be out of the spotlight and the pressure for them to change is subsiding. According to the experts, a failure to thoroughly change now will continue to present problems in the future.

In charting the reform course for Japan, it is important to consider the past role of the Japanese government. After all, the country's economic miracle came as a result of the government's policies that were executed by industry and financed by the banks. It seems now that these policies are outdated and the people that brought them about are entrenched against change. In today's world, old style single party bureaucracies are giving way to newer, more democratically elected governments. Without a doubt, it is the former that brought success to Japan by re-enforcing conformity, productivity, and unity. In fact, this system is hailed and emulated by many developing countries as an economic model. For Japan, however, which is on higher-level playing field, a more competitive, deregulated system seem much more palatable.

Some steps in that direction have been taken already. Telecommunications, oil imports, and television have been opened to foreign competition. Ford was able to take a controlling stake in Mazda and Rupert Murdoch purchased a large share of Asahi National Broadcasting. As a result of recession and an inherent need for greater domestic competition the government lifted restrictions on new supermarket openings. And General Electric refrigerators are finally making their way to the Japanese market. Nevertheless, much needs to be done to deregulate financial services, construction, agricultural, and automotive sectors. On the average, Japanese consumers are estimated to pay 10 times higher prices for products because of protection and buy-Japanese policies.

Aside from government regulation, what some sources recommend is a change in both the way the Japanese government is organized and the amount of opposition its gets. Unlike other democratic industrial societies, Japan espouses the ideal of collectivism with feudal overtones. Japanese government ministries have been compared to fiefdoms exercising immense power in which loyalty to a clan is a key for advancement and success. And this is not only the case in the government but also in the industry. According to the analysis by the Financial Times, it is the concentration of power in the MoF that partially caused the jusen crisis. Again, the recessionary pressures did not last long enough for the Japanese government to consider re-inventing itself. It seems unlikely that MoF will be reorganized and its power divided between budgetary and financial agencies.

Another problem cited by several sources is the speed in which government decisions are made in Japan. Despite conformity on the surface, Japanese government's division into omnipotent ministries seems to perpetuate the idea of clannishness. Creating and implementing decisions in such a system is difficult and not responsive to the emerging world of 21st century commerce.

Finally, the recession in Japan was obviously not long enough to create dissatisfaction with the political system. The long entrenched Liberal Democrats continue to rule the country despite instability in the past four years, construction industry and jusen scandals, and unpopular measures such as a proposed sales tax hike from 3 to 5 percent. Prime Minister Ryutaro Hashimoto is enjoying a 53 percent approval rating, based on his tough stance with the US on automobile quotas and defense issues such as Okinawa.

Security in the Pacific will remain a precarious issue in the future, considering North Korea's occasional hostility and recent Chinese muscle-flexing in Taiwan. Both allies agree that Japan will continue to need American help, but as Japan grows its sphere of influence in Asia, it is only reasonable for it to contribute its share, especially to the Navy bill. While most Japanese disapprove of its military's expanded regional role, many desire greater political independence for Japan, which is echoed in Mr. Hashimoto's politics.

Another reason for Mr. Hashimoto's strength is the weakness of his opposition, especially his main rival, Ichiro Ozawa, who heads the New Frontier Party. Mr. Ozawa was elected to party leadership last December promising to refresh Japanese politics which until then consisted mostly of infighting among different factions of the Liberal Democrats. However, after trying to block the jusen bail-out bill in the parliament, the Japanese people began viewing Mr. Ozawa as an impediment to progress whose only goal was to abuse parliamentary democracy. Although the jusen bill was highly unpopular, once the public accepted what needed to be done, anybody who stood in the way of its implementation was ostracized. Worse yet for Mr. Ozawa, it seems now that his New Frontier Party is splintering into two factions, of which one may be going back with the Liberal Democrats, where the NFP originally grew out of.

Aside from the long-term changes to the Japanese government system and its politics, there are more immediate modifications that need to be made to the economic system. Experts in and outside of Japan agree that the much of the impetus to grow out of the recession came from the government itself. In order to kickstart the economy last year, the interest rate was cut in half to 0.5 percent and the government injected 14.22 trillion yen in public spending or 1.5 percent of GDP in new money. As a result, this year's GDP growth is estimated to grow by a rate between 2.5 and 3 percent. Private spending, corporate investment, and government spending all increased dramatically in the first quarter this year compared to the same period in 1995. Despite the high yen, some Japanese companies are showing record profits due to cost cutting, including layoffs that were unprecedented in the Japanese corporate history since World War II. Recently, Japan had a 3.5 percent unemployment, its highest ever. However, the companies are starting to re-hire some employees.

Nevertheless, the cost of a recession fight will show, at least in the public sector. As discussed above about jusens, the government seems to have very little cushion to absorb economic shocks, save for using taxpayers' money. In order to cover the cost of public spending, the government has proposed a 2 percent increase in sales tax. Some now think that this may not be enough and that the rate needs to go up to at least 7 percent to absorb the increase in government debt. The government is also looking for an opportunity to raise the interest rate this fall, but some think that fiscal tightening may come too soon. While a decade ago Japanese government seemed like it could do no wrong, there are speculations now it may be falling victim to a disease well known elsewhere in industrialized world: a mounting government deficit. According to the OECD, net government debt may increase from 10 percent of current GDP to almost three times national income by 2030.

Japan, like other industrialized societies, is faced with other problems such as aging population, decreased productivity, and overcrowding. Productivity is now only 70 percent of that in the US, and its growth fell from 3 percent 20 years ago to only 0.6 percent recently. In addition, as a result of the recession, many Japanese companies moved operations elsewhere in Asia, searching for cheaper labor. This is particularly true in the case of the electronics industry. Japan now manufactures three times more TVs abroad than at home and is a net importer. The same goes for VCRs. Falling production in Japan was replaced by increased production elsewhere in Asia. VCRs are also on their way to becoming an import item for Japan. However, while the Japanese labor force might have suffered from the high yen, the consumers cheered. Imported items such as TVs are now half as expensive. So far, Japanese consumer electronics companies have invested $85 billion in Asia and plan to increase it by additional $10 billion per year. But more about Japan's role in Asia later.

Aging population is another industrial country problem currently beginning to plague Japan. Compared to other industrial nations, Japan has the fastest greying population, By 2010, the OECD estimates that the proportion of 65 year-olds will increase from current 18 to 27 percent. The pension system is underfunded as it is. Another problem looming in the future is overcrowding of the central Japanese cities and towns. While the majority of middle-aged Japanese would not mind living in new coastal towns, their expensive development would most likely go on the government bill.

Having reviewed some of the current issues and problems following the recession, we can now turn to brighter points of the economic upturn. Japan's economic status continues to improve as its companies spread out into Asia. In April, Japan's trade with Asia surpassed its trade with the US and the European Union combined, totaling $25.9 billion. Japan has had a trade surplus with Asia for six years running. In effect, 70 percent or $67.63 billion of its total surplus is with Asia and 60 percent of its overseas investment goes to that region. According to the Ministry of Industry and Trade, subsidiaries of Japanese companies in Asia are more profitable than the ones in Europe, the US, or even Japan itself. Japanese manufacturing in Asia will increase from 8.6 percent of total overseas manufacturing in 1994 to 13 percent in 2001.

Japan is assuming a greater leadership role in Asia. Last year, while chairing the Asia Pacific Economic Cooperation council, it tried to reconcile Asian and American views of regional cooperation. Japan is also working on persuading the US to allow China to join the WTO and take greater advantage of the Chinese economic boom. So far, Japanese industry is very well entrenched in Southeast Asia, especially in the transportation sector. However, China seems up for grabs and Japan may have an uphill battle against the Europeans and Asian tigers. especially Hong Kong, Singapore, and Taiwan. Another motivation behind getting China on its side is that Japan wants to avoid being "canadized" or overshadowed by a greater power next-door. The predictions are that China will become world's second economy in the next 10 to 15 years, challenging Japan's current status. In August it was announced that the US now, for the first time, has a larger trade deficit with China than with Japan.

In ending this overview, we leave you with some useful macroeconomic figures that summarize the effect of the Japanese recession.

	1995	1996*
Total GDP ($bn)	5,114	4,707
Real GDP growth (%)	0.9	1.7
GDP per capita ($)	40,175	37,367
Annual change in industrial production (%)	3.2	3.0
Unemployment (%)	3.2	3.3
Current account balance ($bn)	110.4	85.4
Exports ($bn)	427.3	438.1
Imports ($bn)	292.5	332.4
Trade balance ($bn)	134.8	105.7

Main trading partners (1995, % of total)

	Imports	Exports
United States	22.4	27.3
South Korea	5.2	7.1
Taiwan	4.3	6.5
Hong Kong	n/a	6.3
Singapore	n/a	5.2
China	10.7	5.0

Sources: Economist Intelligence Unit, Financial Times
Note: 1996 figures are estimates

Table of Content