FEER: Japan: Back to Slowly,Slowly

[Dao Van <daotb@yahoo.com>]

JAPAN Back to Slowly, Slowly Obuchi's brief moment as an advocate of
change is well and truly over.  With next year's elections already in
mind, he makes clear that he would rather prop up existing businesses
than follow the harsh American model of slashing jobs to promote new
growth.  His goal: to find some middle ground, a Third Way. 

((                By Chester Dawson and Nayan Chanda
in Tokyo Issue cover-dated December 2, 1999
))

Japanese Prime Minister KeizoObuchi likes to call himself the "dull
bull," meaning that he moves slowly but steadily.  As he heads for the
November 28 regional summit meeting in Manila hosted by the 10-nation
Asean group, the nickname seems especially apt.  For Asean economies
still struggling to recover from financial crisis, Obuchi is bringing a
grab bag of aid in the form of new, low-interest credits and investment
funds.  But most welcome to Japan's neighbours would be an announcement
of bold new reform measures at home that would turn Japan back into an
engine of growth for Asia.  Instead, in an interview with the REVIEW
ahead of the summit, Obuchi made clear that popular opposition to high
unemployment will take precedence as he prepares to lead the Liberal
Democratic Party into elections due next year. 

"Basically I do support
restructuring,"Obuchi says, "but not the kind of drastic restructuring
common in the U.S.  and Europe, or so-called chopping off live people's
heads." He says he has been advocating a gentler
"Third Way" to reform. What is that
exactly?  "American-style lay-offs, sudden cuts that create instant
unemployment, just aren't acceptable," Obuchi says.  Neither is
institutionalized high unemployment buffered by costly welfare benefits,
as in Europe, he says.  "We don't want people to lose the incentive to
work.  We have to find a middle ground." Whether or not he can find it
will be the ultimate test of his leadership. 

Bold on Banks

Obuchi, 62, long regarded as a cautious consensus-builder rather than a
visionary reformer, won kudos a year ago for enacting much-needed
economic-stimulus and bank-bailout measures.  Last April, just ahead of
an official visit to Washington, he wrote in an essay published in The
New York Times that
"Japanese companies can no longer afford
to make social stability a priority and keep workers on the payroll
regardless of earnings." But as elections loom, he's reverting to a
slowly, slowly approach more typical of his conservative faction in the
LDP."The strengths of Japanese-style management should be retained," he
told the REVIEW.  "Japanese companies have a strong sense of
responsibility to society."

Obuchi acknowledges that Japan also has a responsibility to the region. 
Japan accounts for two-thirds of Asia's economy, and two straight years
of recession beginning in 1997 caused a painful drop in Japan's imports
from and its investment in its neighbours.  Now Japan is growing again,
but not by much.  The government expects the economy to expand 0.6% in
the fiscal year that ends in March.  "The following year we want at
least 2% growth," says Obuchi. 
"Otherwise, it will be difficult to live
up to our international obligations to Asia and the global economy."

Even as Obuchi shrewdly voices what most Japanese still want to hear
about job security, however, Japan Inc.  is increasingly tuned to a
different message, one from the global marketplace.  In recent weeks,
large Japanese corporations have been announcing unprecedented job cuts,
plant shutdowns and mergers in an effort to slash costs and boost
competitiveness. 
"Obuchi can say what he wants but the
companies are going around merrily chopping heads," says Rudi Dornbusch,
Ford professor of economics and international management at the
Massachusetts Institute of Technology. 
"The Japanese model on the corporate
side has gone totally, but the political model can't afford to admit
that."

That doesn't mean Obuchi's renewed caution is irrelevant.  Some critics
worry that his feel-good policymaking is only staving off critical
adjustments that will have to be made later.  "It's all just Band-Aid
politics which doesn't resolve any underlying problems," says Soichiro
Tahara, a critic who hosts a weekend television talk show on politics. 
Since Obuchi took over in July 1998, the government has approved Yen24
trillion
($227 billion) for public-works spending,
Yen60 trillion for bank bailouts and Yen20 trillion for a loan-guarantee
programme targeting small and medium-sized enterprises.  And that
doesn't include a new, Yen18 trillion stimulus package announced on
November 11.  Construction companies, banks and small
businessmen--important LDP constituents--are the main beneficiaries. 

Obuchi's latest package both allocates more funds for the loan-guarantee
programme and expands it to more companies.  That worries Ed Lincoln of
the Brookings Institution in Washington, formerly a special adviser to
the U.S.  ambassador to Japan.  "The government has been pursuing a
policy for the past year or so to prop up small businesses.  And that's
the worst of all possible things they can do," he says.  "Japan needs a
lot of restructuring."

Pitfalls Ahead

Another potential pitfall: The programme exposes the government--and
ultimately taxpayers--to heavy losses.  Obuchi says confidently:
"Japanese are the most reliable people in the world when it comes to
repaying loans."

To be sure, Obuchi's pump-priming has been widely praised for preventing
a financial-sector meltdown, which could have severely affected the
world economy.  "When he came to power, Japan was just inches away from
an implosion," says Kenneth Courtis, economist at Deutsche Bank in
Tokyo.  "He brought us back from the brink." Obuchi can take credit for
a 2% first-quarter surge in gross domestic product compared with the
previous three months.  Unemployment is down slightly from an all-time
high during the summer of 4.9%, and corporate bankruptcies have dropped
sharply compared to 1998. 

Still, economists say much of the spending is misdirected into
construction projects that won't generate much future growth.  Critics
say it would be better to cut taxes so as to give the money back to
consumers, whose weak spending impedes a return to self-sustaining
economic growth.  Meanwhile, despite Obuchi's best efforts, unemployment
seems sure to rise as more and more companies jettison once-hallowed
lifetime employment. 

Indeed, political calculus and marketplace realities may be moving in
separate directions.  Nissan Motor's decision in October to axe 21,000
jobs got a chilly reception from Obuchi but started the ball rolling. 
Since then, other blue chips have unveiled large-scale job cuts,
including Mitsubishi Heavy Industries and Nippon Telegraph & Telephone,
albeit mostly through hiring freezes and transfers to affiliates.  "We
may be beginning to see a slow division between the business and
political worlds," says Shigenori Okazaki, a political analyst at
Warburg Dillon Read in Tokyo.  "Major companies are restructuring no
matter what politicians say."

Obuchi has reason to be cautious: His public-approval rating has slid to
32%, from a record high of 48% in October, since the LDP took on a new
coalition partner, a party backed by a tight-knit Buddhist organization.
But most other politicians are equally lukewarm about reform.  One
exception is Koichi Kato, an Obuchi foe in the LDP who recently declared
in a speech: "What we have to do now is shift--even a little
extremely--to competition, market economy and small government."

Voters are unlikely to rally to Kato's call. 
"More restructuring and reform are
absolutely necessary but we cannot push it through at the same pace as
in the U.S.," says Sahoko Kaji, an economics professor at Keio
University.  "American-style reform would be completely unacceptable to
the Japanese public." Incremental reform via Obuchi's Third Way is the
likely outcome. 

And that offers Japan's neighbours scant hope for a speedy turnaround in
the fortunes of the world's second-largest economy. 

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