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Monday, 3 September, 2001, 10:52 GMT 11:52 UK
Japan will fight back
Ginza - Tokyo's main shopping district
The Japanese are not poor - districts still bustle with shoppers
By the BBC's Rodney Smith

One of the first things the visitor to Japan notices is the almost oppressive crush of buildings, bridges, roadways, anything and everything made of concrete and steel.

The next is the relative wealth, evident almost everywhere. The Japanese are not poor; Japan is not as littered with derelict buildings and run-down industrial as the rust belt of the eastern United States, and large parts of Europe, west as well as east.

The second biggest economy in the world is shrinking and may soon slip to third place behind the European Union.

But with a population barely a third of the EU, a landmass a mere fraction of the meadows forests and mountains of Europe, and no natural resources of its own, the surprise must be that that has not happened sooner.

The streets and the huge department stores of Tokyo's Ginza shopping district still bustle with shoppers, the electronics and gadgets stores of Akihabara still bulge with buyers, most of them, not tourists, but Japanese.

Affluence endures

The Japanese do not feel like a deprived people.

Japans Prime Minister, Junichiro Koizumi
Junichiro Koizumi's government hit hard by the global downturn and plunging exports

They know there are problems in their economy, but most of them continue to earn their comfortable working lives, still leaving space for skiing holidays in the North, junkets to the huge hotels that ring Tokyo Disneyland; delivered to these and neighbouring foreign tourist destinations in their hundreds, by airlines that rely on jumbo 747s where US and EU airlines fill smaller aircraft.

Things are changing. Unemployment is now at 5% and growing, boosted by multiple thousands of job losses at electronics and high tech companies feeling the pinch of the economic slowdown world-wide.

But this is still well short of the figure in Germany and France, and only just ahead of the US at the height of full-employment development.

Japan is being twisted tighter and tighter into a deflationary spiral that is sapping the ability of a hugely indebted banking system to lend, and a cautious corporate sector unwilling to borrow in the knowledge that deflation means that debt can only grow while output falls in value.

Experience counts

But Japan will learn to deal with the pain of deflation.

Critical economists, bankers and business people inside and outside Japan cannot wait for the adjustment to begin. "Start with the debt-strangled banks," they say. Japanese banks owe immeasurable billions of dollars.

But Japan is a special case. This country has known economic deprivation and devastation before.

Fifty-five years ago, the country was devastated, typified by the destruction of Nagasaki and Hiroshima.

The Japanese are a resourceful island race; they picked themselves up, and with no natural resources of their own, no coal, or iron, or oil, or gas, had grown within thirty years to world dominance in shipbuilding, vehicle production, consumer electronics and similar industries.

When in the 1970s the global economy began to evolve; the growing interaction of financial and commercial markets, the Japanese proved that they could conquer stock-broking and investment banking as well. Giants like Nomura, Bank of Tokyo Mitsubishi and others became household names almost overnight.

This is not a people to be swamped by economic collapse.

Legacy systems

A large part of what stifles modern Japan is the business practices and corporate institutions it created during its post-war recovery.

A tight web of connections between banks, industry and politicians was necessary for the reconstruction phase to take place.

Other countries, most obviously large European economies, have had similar problems; they have been learning how to unwind them.

Admittedly, there is probably little hope that the ruling Liberal Democratic Party (LDP) will carry through all the changes that are necessary to solve Japan's problems.

Prime Minister Junichiro Koizumi promised a seven-point reform programme after he came to power.

Nothing so far, but the honeymoon is almost over, and he has scheduled a start on them in a few weeks, before the end of September.

His biggest task, if he is to succeed, will be to persuade his LDP colleagues of the need for change.

Throwbacks

It will be no easy task. The LDP is the cement that holds the bank/business/politics triangle together, and has been responsible for much of what is wrong in modern Japan.

LDP members past and present have gained hugely from their office; noted LDP critic, economist Seijiro Takeshita at Mizuho International points out, tackling them would be like declaring war on Mr Koizumi's most influential group of supporters.

But that is what he will have to do.

If not him, then his successor, or his successor's successor, eventually possibly of another party. The LDP has its own survival problem. Its giants are ageing; sooner or later they will be replaced by someone else.

Japan faces tough internal choices, very like those that many European countries have grappled with, and are grappling with still. Success will come at a cost, and all Japanese know what it is. Unemployment and consequent social disruption and pain will be part of it.

But this country beats its problems. It has risen and defeated mighty enemies before - like Russia, almost a century ago.

It rebuilt itself after the Second World War, its shipping, motor manufacturing and electronics business leading the world. Within thirty years of disaster.

It can do it again, against its new, economic enemy.

See also:

31 Aug 01 | Business
Sun sets on jobs for life
31 Aug 01 | Business
Hitachi cuts 14,700 jobs
31 Aug 01 | Business
Japanese prices spiral downwards
30 Aug 01 | Business
Japan steps closer to recession
27 Aug 01 | Business
Japan 'aid' for unemployed?
24 Apr 01 | Asia-Pacific
Analysis: Japan's leap into the unknown
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