April 15, 2003
Contrarians have long been trying to make a case for Japan, and it remains very much against the consensus to have a positive view on Japan. These same contrarians have also been waiting for the bond market bubble to burst. But contrarian bets only work if the direction changes--for example, if what has been causing the malaise plays itself out, or an event or a series of cathartic events causes the secular trend to reverse. The further condition is that this change of direction must be perceived as such by investors.
Even when major secular trends bottom and begin to reverse, it sometimes takes years before investors realize what is happening. When the US market first began its historical bull run in the early 1980s, investors were still worrying about twin deficits, structural weakness in the dollar, and double dip recessions.
But then someone came along who helped restore confidence in their own future, someone who tried to shrink government and let entrepreneurial spirit lead the way; someone whose policies at the time were dismissed as voodoo economics. They were not Nobel prize-winning economists or financial geniuses, but they did have a very clear vision of what needed to be done, and were politically effective enough to transform most of what they envisioned into policy. It was people like Ronald Reagan in the US, Margaret Thatcher in Britain, and Mikhail Gorbachev in Russia that set the stage for a major renaissance of laissez faire capitalism in the 1990s.
Japan has had glimmers of such a hero on several occasions over the past decade. First there was Morihiro Hosokawa, who bolted from the LDP to spearhead an opposition coalition that ended 38 years of LDP single party rule in 1993. But while he was able to pass corruption-reducing electoral reforms in 1994, these reforms have done little to abate the steady stream of political scandals. Then there was Ryutaro Hashimoto. Mr. Hashimoto devoted his energies to six areas of domestic reform: administrative, fiscal structure, social security, economic structure, financial system, and education-reforms that had no lasting effect on eradicating the Heisei Malaise. Indeed, Mr. Hashimoto was more remembered for his ill-timed raising of the value-added tax (VAT), and the premature "big bang" in Japanese financial services. Now, we see Junichiro Koizumi, who boldly promised to dramatically reform Japan's government administration and to push through aggressive reforms, i.e. a "no pain, no gain" platform.
But the Japanese voting public has become increasingly despairing of not only the LDP but also the other main political parties as the Heisei Malaise drags on. They are disgusted by the political gridlock that never seems to achieve any lasting progress, they are fearful for their jobs, and they have no confidence in Japan's future. In short, they are desperately seeking a real hero, and are politically latching on to anyone who exhibits even temporary hero-like qualities, be it Mr. Hosokawa, Mr. Hashimoto, or Mr. Koizumi.
Mr. Koizumi was hailed as Japan's great hope, but the public is beginning to suspect that in Mr. Koizumi's reform programs, it is the voting public who gets squeezed unfairly while the perpetrators of the malaise continue to survive on the government and the banking sector's dole. They sense he is backtracking on the very reform promises that got him in office. His popularity was already dropping sharply last May, when the polls first showed a crossover between those supporting and not supporting his administration. Moreover, a Kyodo survey showed 80.2% of the respondents not expecting his Cabinet to last more than another six months to a year.
He was able to rescue his ratings somewhat with a quick trip to North Korea, but his opponents continue to steadily encircle his Administration, increasingly frustrating reform initiatives. Mr. Koizumi and his Cabinet are becoming entrapped by opposition within and without his party to the extent that there are doubts about his ability to survive as Prime Minister after September. Opponents have been emboldened, as his once unassailable popularity with the voting public is now looking very vulnerable.
Mr. Koizumi's best hope for a recovery in popularity and a better-than-even chance of surviving past September is the Industrial Revival Corporation (IRC) and the new Bank of Japan governor. While central banker Toshihiko Fukui probably has more credibility at this point than the entire Koizumi Administration combined, he is already testing this credibility with a greater number of iffy asset purchases that will probably be unreciprocated with coordinated government policies. This would undermine the already doubtful impact of these unconventional policies. A weakened Koizumi government could prove politically unable to deliver their end of the government-BOJ accord they so badly wanted to establish with the BOJ, potentially leaving Mr. Fukui and his increasingly unconventional monetary policies high and dry.
Half-baked reforms and restructuring, far from providing the economic stimulus as envisioned, have only exacerbated the short-term pain. It has not brought increased spending, but actually the opposite. In the meantime, it has also significantly exacerbated Japan's debt position. Finally, Mr. Koizumi has presided over one of the most dramatic destructions of investor capital in modern history. This is the pain Mr. Koizumi promised. But if the Koizumi Administration is in its last days, we will never get to see if their grand design for future gains was really achievable, and instead could see more of the policy backlash that is already developing as Mr. Koizumi's popularity wanes.
Author, Darrel E. Whitten
Director, The IR Corporation
Tokyo, Japan
e-mail: whitten@ircorp.co.jp
Editor-in-Chief, Ichiro Araki
Director of Research
Research Institute of Economy, Trade and Industry (RIETI)
e-mail: araki-ichiro@rieti.go.jp
tel: 03-3501-8248 fax: 03-3501-8416
RIETI invites you to visit its English website
[http://www.rieti.go.jp/en/index.html].
The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).
