Can Japan come back?

• Author: Hartcher, Peter
• Position: Emerge from recession

By the time the bombing stopped and the smoke cleared, Japan's total economic losses from World War II amounted to the equivalent of about one year's national output. That tally included everything that could have a price put upon it - the factories and the flamethrowers, the homes and the howitzers, the silos and the submarines. In modern values, the bill was 19.5 trillion yen or some 140 billion dollars.(1)

The bursting of Japan's "bubble economy" in 1990 started another extraordinary episode of wealth destruction. The war, of course, was incomparably more costly in human terms. But Japan's 1990s peacetime disaster of deflation has been vastly more expensive in an economic reckoning. Within five years - from 1990 to 1995 - a period comparable to the length of the Pacific War, the collapse of land values and stock prices had inflicted losses equal to nearly two years' national output. The money value of these losses was 827 trillion yen or about 6 trillion dollars. It takes Uncle Sam four years to collect this much in taxes and it takes the Russian economy fifteen years to generate this much wealth. And Japan's losses are still mounting as land and stock prices continue their long downward trajectory.(2)

The nature of the experiences differs. The wartime damage was chiefly physical, the peacetime losses financial. But the comparison brings into perspective the enormity of Japan's self-inflicted economic disaster, one more costly than losing a major war. And it raises the question: can Japan bounce back this time? A growing body of expert opinion says no.

Japan has been in stagnation now throughout the 1990s, the gloom punctuated only by the false dawn of 1996, when it seemed that recovery was nigh. The short-term outlook is poor enough. One of the more accurate forecasters of Japan's economy over the last decade, Nobuya Nemoto of the Nomura Research Institute, told me in June,

We already have most of the necessary conditions for the recession to become a depression. We have a fragile banking system, a credit crunch, falling corporate earnings, companies are pushing wages down, that is dampening demand, and prices are falling - this is the prototype of a depressionary spiral. A crash on Wall Street now may be enough to cause the recession to become a depression.

Since then, Wall Street has begun to show signs of obliging. "The worst of the adjustment may not be behind us", Nemoto added, "it may be ahead of us."(3)

The customary consolation for short-term misery is the prospect of longer-term prosperity. But the striking element of Japan's mess today is that there is no such guarantee. There is no light at the end of the tunnel, only an unrelenting blackness. Until the bursting of the bubble, Japan's rate of economic growth had fallen significantly below 3 percent only once in thirty years. But now the Ministry for International Trade and Industry (MITI) estimates that even if the country manages to emerge from recession, its maximum potential growth rate until the year 2010 is a pathetic 1.8 percent, and a miserable 0.8 percent thereafter. And that is one of the more optimistic assessments.

One of Japan's foremost economic think tanks foresees at least a quarter century of stagnation - or worse. A nonprofit affiliate of the Nikkei newspaper group in Tokyo, the Japan Center for Economic Research, this year issued its regular outlook for the Japanese economy over the next twenty-five years. It projects near-zero growth for the next few years and then a long period of gradual but unrelenting shrinkage in Japan's economy. Or, as Warburg Dillon Read's chief economist in Tokyo, Brian Rose, puts it, "I don't think there is going to be a happy ending to the Japan story. I think the current stagnation is as good as it gets - these are the golden years. Everything points to Japan sticking with its current line of policy, which is stagnation. And a very long period of stagnation."

History, Karl Marx said, is economics in action. If so, then what would a long Nipponese stasis imply? "Think of it this way", suggests the regional economist for Prudential Bache Securities in Hong Kong, Robert Rountree:

Britain has been in decline since World War II. So what's the big deal about Japan entering the same phase? The UK lost the chemical, motorbike, and steel industries and now it's in the process of losing the finance industry as it's bought up by foreigners. Britain has lived off its savings through the current account surplus.

People are worried about Japan because it is a paradigm shift. But once the Japanese invest overseas again and start earning nice fat returns on their investments, just as the Brits do, things will settle down again. Unfortunately, the cost of this shift could be a world recession.

In Japan's Foreign Ministry, a senior official explains that the new reality of a no-growth economy will transform Tokyo's global strategy:

We have been trained in a linear track mentality. We have now come to the end of the line and we have to adjust. We have to re-set our national goals in this new climate. We have been aiming in the long term to be a superpower. We now have to learn to live comfortably as a power - not a superpower. We have been aiming to alone represent Asia. Because of China's growth and our stagnation, we have to now recognize that this is unrealistic. We have to learn to be modest about our capacity and the limits of our power.

The Clinton administration appears to accept the inevitability of Japan's long-term relative decline. Bill Clinton's trip to Beijing this year was the first time in the postwar period that a U.S. president had visited China without also visiting America's key security ally in the region and Asia's economic superpower. Assuming that this was studied rather than inadvertent, one can surmise that the President was acting on expectations of the future status of the big Asian powers rather than current realities, as Japan is not only America's chief security partner in Asia but has an economy five times the size of China's. To borrow the jargon of the market, Japan is trading at a big discount to its face value.

But is this assessment correct? The world has consistently underestimated Japan's powers of transformation. Japan is a dribble of small islands spattered along the eastern coast of the Asian mainland. It has a population the size of Pakistan's and only half that country's land area. It does not have the natural resources to support...