Lesson from Japan`s economic decline

The Japanese economy is heading toward a major crisis. Just six months after the Bank of Japan lifted its zero interest rate policy in the judgment that the economy had entered the recovery phase, conditions are once more deteriorating. Not only indices of actual economic activity like mining and manufacturing production, exports, unemployment and inflation, but also foreign exchange rates and stock prices are showing record lows on an almost daily basis.

The Japanese economic downturn may be attributed to sluggish exports caused by the U.S. economic slowdown, lackluster consumption amid growing unemployment and an incomplete information technology (IT) revolution, but a more decisive reason is Tokyo`s lukewarm restructuring in the corporate and financial sectors. Japan has made efforts to liquidate its ``bubble`` economy over the past 10 years. But due to tepid restructuring, fears of economic crisis were typically raised when economic conditions showed signs of worsening even marginally.

The ongoing ``March crisis`` prompted talk that it would be difficult for Japanese banks to meet debt-to-equity ratios stipulated by the Bank for International Settlements. Due to increases in nonperforming loans and difficulty calling in loans from Japanese businesses, there are fears that if enterprises go bankrupt en masse due to the credit crunch, the rate of stagnation of the actual economy could increase. If stock prices keep falling, the impairment of value of the stocks possessed by banks will further expand, adding fuel to the crisis.

In 1999 the Japanese government poured 60 trillion yen in public funds into the financial sector to expedite the disposal of nonperforming loans in accordance with the newly enacted Financial Resuscitation Law and Law on Sounder Financing. Nonetheless, nonperforming loans have continued to increase due to sluggish restructuring in so-called ``bubble`` industries like construction, real estate and distribution. As part of measures to boost business, the Japanese government forced banks to offer loans to small- and medium-sized enterprises. There were also allegations that banks, fearful of being called to account for mismanagement when requesting public funds, did not ask for sufficient amounts of public money. Now, efforts to patch up the problems and failure to push restructuring more boldly stand in the way of Japan`s economic recovery.

Japan`s politicians are only adding to the crisis. Despite the restructuring that has been carried out for a decade, the political world has not yet presented even an economic blueprint. The ``Financial Big Bang`` that started in 1996 while Prime Minister Hashimoto was in power has not yet produced any tangible results. Japanese politicians are also wasting time reforming laws and systems, thus further delaying restructuring. Those in the political world are obsessed with winning votes in the elections and Japanese bureaucrats typically fail to make swift and bold decisions, clinging to the egoism of each agency. Of late, Prime Minister Yoshiro Mori has become a lame duck thanks to a series of scandals, which has only added to the reality of the ``March crisis.``

During the crisis in 1998 and 1999, the Japanese government was able to push through certain financial policy initiatives. Since 1998, it devoted itself to pump priming by injecting 64 trillion yen into public financing. However, the state`s debts accounted for 130 percent of Gross Domestic Product (GDP) of 666 trillion yen and international credit rating agencies were lowering the credit ratings of Japanese state bonds one after another. It won`t be easy to push through restructuring by pouring in more public funds. The Japanese Office of Finance is considering wiping out the nonperforming loans through the direct depreciation method of eliminating them. This would replace the previously used indirect depreciation method of accumulating allowances for bad debts in order to resolve the problem of snowballing bad loans. But there are many obstacles to implementing this plan due to the moribund real estate market and a lack of related laws and systems. The primary task of the Japanese government as far as implementing policies in the days to come is how to revive the financial system by disposing of bad loans while at the same time minimizing the ill effects on the real economy.

The reason that we are concerned about the stagnation of the Japanese economy is that it has a considerable influence on the Korean economy. Japan is still the ``leading stock`` in Asia. It is no wonder that Japan`s unease typically spreads to other Asian countries. Japan is suspected of overlooking the yen`s depreciation for the sake of boosting exports. It is also feared that Japanese banking institutions may seek to recover loans made to Korean banks and other financial institutions. Such loans amount to about $4 billion, although most are long-term funds. If Japanese banks adopt the market value method for accounting, the situation will be serious.

Lessons derived from the Japanese economic crisis are that we have to isolate financing from nonviable businesses and complete financial sector restructuring as soon as possible. If we ignore the larger issues by treating only the symptoms, the problems will later become bigger and more serious.

Lee Woo-Kwang, Chief of Japan research team at Samsung Economic Research Institute