SYNOPSIS: Japan's Economic Bataan death march is a reminder of what can go wrong
Japan's Liberal Democratic Party isneither liberal nor democratic. Nor is it exactly a party in either the European or American senses: it is more like a coalition of patronage-driven political machines. And it does not exactly have a track record to be proud of, having presided over a decade of stagnation in an economy that was once the wonder of the world.
Yet despite its apparent vulnerability, not to mention the personal unpopularity of Prime Minister Yoshiro Mori, the L.D.P. managed -- just -- to cling to power in last Sunday's election. The main reason was that the opposition seemed, if anything, even more clueless than the bumbling Mr. Mori about what to do next. And that is something we should all find disturbing.
Whenever I write about Japan, I get quizzical letters from Americans who don't see why they should care. The world's second-largest economy is neither doing well enough to provide villains for a Michael Crichton novel nor badly enough to pose any clear and present danger to prosperity elsewhere. So why should anyone without a direct financial stake be interested in its troubles?
The answer -- the reason professional macroeconomists are grimly fascinated by Japan's economic malaise, and you should at least be interested -- is that Japan's sad tale is a reminder that the roots of prosperity may be shallower than we like to think. It's not just the historical parallels, though Japan in the late 80's shared many of the features of America in the early 00's: high growth without inflation, technological dynamism, extremely high stock valuations that analysts somehow managed to rationalize. What is really unsettling about Japan is not so much the fact that it went wrong but the way it went wrong.
If you had polled serious economists a decade ago, and asked whether it was possible for a modern economy to experience a decade of "demand-side" stagnation -- productive capacity going unused because consumers and businesses could not be persuaded to spend enough -- I am sure that 99 percent of them would have answered "no." We had learned the lessons of the Great Depression; never again would the leaders of a major economy make the mistakes that allowed that slump to go on so long. Even now a fair number of my colleagues seem to think that a slump that cannot be cured with a sufficiently low interest rate is theoretically impossible. Yet that's the reality in Japan, and if it can happen there, why not here?
Admittedly, Japan does not look like a nation in the midst of depression, mainly because we have learned something these past 70 years: instead of trying to balance its budget in the face of a slump, the L.D.P. has engaged in huge "pump-priming" deficit spending. Or maybe that's a bad metaphor. Japan's fiscal efforts don't call to mind a farmer getting his pump running so much as sailors frantically bailing out a leaky boat. So far they have succeeded in keeping the boat from sinking, giving themselves time -- but time to do what? Neither the L.D.P. nor the opposition seems to have any idea.
The only Japanese policy makers who have a clear vision of what to do next are its central bankers, who have been preparing the public for the imminent end of their "zero interest rate" policy. Why insist on the need to raise interest rates when the economy is still so depressed, when independent economists are warning that Japan may well slip back into recession later this year? To force structural change: the Bank of Japan believes that it must raise interest rates to force the private sector to become more efficient. This is just a modern version of "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. . . . It will purge the rottenness out of the system" -- the disastrous advice that Herbert Hoover received from Andrew Mellon, his Treasury secretary.
And that is the other reminder from Japan. In the United States we have come to rely on Alan Greenspan's knack for doing the right thing in an emergency. After seeing the financial crises of both 1987 and 1998 turn out to be manageable, we have come to take sensible, even heroic action on the part of key economic officials for granted. But in reality a good Greenspan is hard to find. So Japan's troubles are a reminder of the lack of wisdom with which the world is usually governed. Originally published in The New York Times, 6.28.00