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Wednesday, 21 June, 2000, 15:48 GMT 16:48 UK
Japan's economic muddle
Do the Japanese  voters have the stomach for reform?
Do the Japanese voters have the stomach for reform?
By BBC News Online's Steve Schifferes

As Japan's voters go to the polls, their country's slow recovery from recession has left the government's economic record in tatters and its population deeply worried about their future.

Since the "bubble economy" burst in the early 1990s, the post-war economic landscape of Japan has been transformed.

The government was forced to spend billions of yen in bailing out the banking sector, which had made many bad loans, especially in the property sector, where prices became vastly over-inflated.


When will consumers return to the shops?
When will consumers return to the shops?
Two of the biggest banks had to be taken over by the government and were eventually sold off.

As well as the banking crisis, the government has been attempting to kick-start the economy by spending billions more on public works projects.

There have been a series of recovery programmes. The latest, last November, is scheduled to spend nearly $200 billion.

Debt trap

All this has led to a huge increase in public sector debts, which is the highest among developed countries.

At $6.3 trillion, it represents 136% of GDP.


The Bank of Japan has kept interest rates low
The Bank of Japan has kept interest rates low
The interest payments on national debt consume 65% of tax revenues, limiting the scope for government reform.

"A truly historic downside risk is emerging in Japan today, posing a threat to global economic stability," say MIT economists David Asher and Robert Dugger.

In a report, they say that Japan's "Financial Mt Fuji" is in serious danger of a huge eruption with global fall-out.

And the government pension system is also facing crisis, with the percentage of Japanese who are over retirement age set to soar in the next two decades.

Companies restructure

Japanese companies, although highly successful at exporting, are increasingly shifting their production overseas, pushing unemployment up to post-war record levels of nearly 5%.

This has led to a collapse of consumer confidence, as workers lack the same level of unemployment benefits available in the West.

Japan has one of the world's highest saving rate, with up to 35% of household income going into private savings.

But people get a very poor return on their money, as the Japanese central bank has kept interest rates near zero to help finance the government's huge borrowings.

The slow deregulation of the financial sector has meant that relatively little of those savings are channelled into the stock market, compared to other developed countries.

Turning the corner

The Japanese government has claimed that after two quarters of negative growth, the economy has turned a corner this year, with an expansion of 2.4% in the first quarter of this year.

But those figures, which gave an overall growth rate of 0.5% for the financial year, have been questioned by outside experts.

Even the Organisation for Economic Cooperation and Development believes that Japan's economic figures are unreliable, an impression enhanced by actions by Japan's statistics agency, which omitted a key figure in order to flatter the figures.

It admits that predicting Japan's future growth rate is highly uncertain.

Japan's politicians have been predicting an end to the recession for years. In 1997 Japan raised taxes and interest rates in the mistaken belief that the recovery was on the way - a mistake that plunged the country back into slowdown and cost Ryutaro Hashimoto his job as prime minister.

Reform stalled?

Japan's ruling party has been struggling with the problem of economic reform, which is complicated by its unwieldy structure which mainly depends on patronage.

It took Japan ten years to recognise the severity of the banking crisis, and it took a currency crisis to mobilise the political support to do something about it.

Much of the LDP's rural electoral base depends on subsidies to agriculture and construction provided by the government.

Tackling those inefficiencies, and facing the need for greater taxation to meet the growing budget deficit, could be painful for the ruling coalition.

But even a change of government would not necessarily make reform easier.

The LDP's main coalition partner, the Buddhist Komeito Party, favours even more spending on measures like childcare.

The leading reformer in the LDP, former party secretary Koichi Kato, does not get on with Komeito, but would probably be forced to go along with its spending plans if he were to become Prime Minister.

"I don't think he'd be in a position to put in place a big fiscal U-turn," said Russell Jones of Lehman Brothers Asia.

Even the opposition Democrats are divided about reform, and would need to work with LDP reformers like Kato.

Japan's closed system of decision-making is designed to bind together economic and political elite in a common purpose.

Whether it has the ability to cope with the unprecedented economic challenges ahead is more questionable.

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See also:

21 Jun 00 | Business
Japan's trade gap shrivels
09 Jun 00 | Business
Japan crawls out of recession
25 May 00 | Business
Has Japan cooked the books?
21 May 00 | Business
Japan: Stop-go economy
18 Jan 00 | Business
Has Japan turned the corner?
15 Nov 99 | The Economy
Japan's billion dollar spending spree
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