Japan's Dark Decade

TOKYO — One year after taking office as a political maverick with enough charm and charisma to produce the economic reforms Japan so badly needs, Junichiro Koizumi is viewed here as a disappointment for doing too little too slowly.

“The economy is bottoming out, but the Japanese people realize Koizumi has done almost nothing to correct the serious problems in our economic and political system,” says Mamoru Yamazaki, chief economist of Barclays Capital Japan Ltd.

“There is still little or no reason to be optimistic about the country's long-term economic prospects,” concludes an editorial in the influential Japan Times.

Koizumi's public approval rating has fallen from more than 80%, when he replaced his ineffective and unpopular predecessor in April 2001, to 41% today. In fact, a record 4 out of 10 eligible Japanese voters are so disillusioned with politicians that they no longer support any political party.

More than 10 years after the country's economic bubble burst into a recession, recovery remains elusive. Today you hear references to a “lost decade” and “shipwrecked Japan.”

Japanese auto makers are among the industries fighting their way through the seemingly endless economic morass. Sales of new cars have remained flat at about 4 million units over the last three years. Ward's data shows new car sales for 2001 (including minicars) totaled 4,290,072 units, a mere 0.7% rise over the prior year's 4,260,328.

Negative economic growth is foreseen again in 2002. Unemployment hit a record 5.5% last December. If calculated by U.S. standards, the number would just about double. An alarming deflationary spiral has persisted for more than 31 months, reinforcing consumers' reluctance to spend.

Experts say it is impossible to calculate accurately the number of bad loans bankers have accumulated on their books. One estimate is ¥36 trillion ($280 billion). Should the malaise continue, Yamazaki figures potential non-performing bank loans could exceed ¥100 trillion ($777 billion).

Making matters worse, Standard & Poor's in April again cut the country's credit rating, this time to AA-, ranking Japan lowest among the Group of Seven nations, falling below Italy. The International Monetary Fund recently lumped Japan with Argentina as a serious concern for global growth.

“The Japanese economy faces an unprecedented crisis,” says Iwao Nakatani, president of Tama University. “Worse problems will hit the nation if the government does not come up with strong measures to deal with our economic woes,” he warns.

Yet, the chances of remedies being administered anytime soon appear slim. In a nation ruled by political factions, the prime minister lacks a strong personal following inside his Liberal Democratic Party (LDP).

Old guard foes have been undercutting Koizumi at every turn, hoarding power and plotting his destruction. Many people agree with his supporters that one year is not enough time to solve the country's deep-seated problems. But his critics say a reasonable start has not been made.

Most Japanese politicians still are in denial, willing captives of vested interests such as the farmers, banks and construction industry. They find it easier to talk about reforms than implement them.

It's true that economic restructuring would hurt. More companies would fail, unemployment would worsen, and the fallout would jeopardize most politicians' first priority of getting re-elected. Stephen Usher, a senior analyst at J.P. Morgan Securities Asia, in Tokyo, sums up the situation in one sentence: “No one is willing to take the hit.”

Hugh Cortazzi, a former U.K. ambassador to Japan, agrees. “The Japanese political system appears fatally flawed,” he says. “The LDP, by its efforts to stifle, water down and undermine reform, has shown that it is one of the main obstacles to Japan's revival.”

Robert Feldman, chief economist at Morgan Stanley Japan, citing LDP losses in two of three April elections, says the Japanese people want change. “Koizumi's bargaining position has weakened, and reform is at a standstill,” he says.

But now, with exports beginning to pick up, political leaders favor postponing painful restructuring, praying instead that the economic recovery building in the U.S. will be their nation's salvation by towing Japan along in its wake.

“At present, the only hope for recovery of the Japanese economy is an upturn in the business cycle led by the U.S. economy,” agrees Yamazaki. But that would offer only a temporary respite, at best, argues Chris Richter, analyst at HSBC Securities Japan. “Although some see a small cyclic recovery starting, perhaps, later this year, no one foresees the real structural reform needed to sustain it,” he says.

The anomaly is the automotive industry. Domestic producers have been doing surprisingly well globally, even though they have been unable to escape the doldrums here.

“Since 1990, domestic demand for automobiles has declined 28% and the parc (number of registered cars) has risen from 62 million vehicles to 72 million,” says Kunihiko Shiohara, vice president, Goldman, Sachs (Japan). “Ten percent of young Japanese are jobless, the worst number since World War II, so there are fewer first-time car buyers.”

“Total vehicle sales in Japan this year will be very, very weak,” adds Koji Endo, head of Equity Research, Credit Suisse First Boston Securities (Japan), who foresees a possible decline below 4 million units for the first time since 1974.

Ironically, despite hard times at home, auto makers have been prospering overall. Mazda Motor Corp. in fiscal 2001 made a remarkable reversal from red ink to profits. Even troubled Mitsubishi Motors Corp. managed to break even. Says Endo: “Toyota (Motor Corp.), Honda (Motor Co. Ltd.) and Nissan (Motor Co. Ltd.) made record high profits and expect record highs in fiscal 2002, as well.”

The source of this good fortune is plain enough: windfalls from a weaker yen, plus strong sales in the U.S., where Japanese brands hold nearly 30% of the vehicle market. Japanese auto makers take care to point out that three out of every four vehicles sold in the U.S. were made by Americans.

With the domestic market soft and Europe still an unconquered territory, the U.S. has become the main engine of growth and profit. “Around 80% or more of their (Japanese auto makers') profits are made in the U.S. and the weaker yen pushes them higher,” Endo says.

He bases his calculation on the formula that every one yen decline in value against the dollar yields an additional ¥50 billion ($378 million) in profits for Japanese auto makers.

A weaker yen has a downside, too, increasing the cost of imports, such as oil and raw materials, and, experts say, is not the reason for rising exports to the U.S. Industry experts here say superior products, not exchange rates, account for that success.

“One of the few Japanese industries that has successfully faced the rigors of global competition is automotive. It should be a model for corporate Japan,” says Richter.

Despite the inertia and gloom-and-doom talk, few people have given up on Japan. “There are a lot of well-run companies here,” says Feldman, of Morgan Stanley. A recent study by the firm on the return on assets (ROA) of 3,505 Japanese companies ranked 629 as “daring,” with high leverage and high ROA; 1,058 as “winners;” 505 as “plodders;” and 1,313 as “losers.”

Even though meaningful reforms and restructuring are on hold, there's hope that if economic conditions become much worse, Koizumi — or his successor — will be forced to take corrective actions.

Some claim they can see a glimmer of light, although, aside from a possible cyclic uptick, this may be based more on faith than evidence. Finance Minister Masajuro Shiokawa bravely insists. “Japan is not going to be mired in the dust of the post-bubble economy forever.”

Usher agrees, pointing to “the great entrepreneurial spirit here that's often overlooked. The most competitive companies in the world are Japanese auto makers,” he says. Perhaps, by example, they will lead the nation out of its economic meltdown, but it's not a solution anyone can count on.