World

'Enough is enough'

Tokyo's dithering riles voters—and global markets

KIMBERLEY NOBLE July 27 1998
World

'Enough is enough'

Tokyo's dithering riles voters—and global markets

KIMBERLEY NOBLE July 27 1998

'Enough is enough'

World

Tokyo's dithering riles voters—and global markets

KIMBERLEY NOBLE

It was a basic truth for three generations of Japanese workers: join a big company and it will take care of you for life. Raita Taguchi tried his best to follow the traditional route. Graduating with a degree in economics from a prestigious private university, he was immediately hired by a leading securities firm affiliated with one of the world’s most powerful financial institutions, the Da-ichi Kangyo Bank. Taguchi joined the company in 1988, a boom year in which Japanese planning and efficiency were considered a shining example to the rest of the industrialized world. Nobody, least of all Taguchi, thought this would change within his lifetime.

But for Taguchi, and millions of ambitious young executives like him, the once-safe career path has turned into an endless obstacle course. Only three years into the bank job, Taguchi was laid off in the wake of Japan’s 1990 stock market crash. His credentials enabled him to land another position, this time as a computer programmer at Ebara Corp., a major machinery manufacturer with branches all over Asia. But his skills did not protect him when the impact from tumbling Asian economies hit Ebara’s sales early this year.

That company, too, launched a shakeup and, in April, Taguchi became one of the first employees asked to leave. “I was an easy person to pick,” says Taguchi, explaining that he is unmarried and joined the firm “as an outsider,” rather than being recruited straight from university. “This,” he says, “made me less of a responsibility.”

In response, Taguchi, now 34, has joined the fledgling Network Union, an organization established this year to help the growing numbers of young Japanese who are out of work due to the worst recession since the Second World War. Japan’s jobless rate, which has doubled to 4.2 per cent since Taguchi was first laid off, is at an all-time high. Among young people it is 8.4 per cent. Evidence of the pain is everywhere. “Customers are not spending, because they are worried about the future,” says Tokyo restaurant owner Hiroshi Kunii, whose sales have plummeted by 30 per cent so far this year. “The only way we can cope is by reducing staff and cutting costs.”

And by lashing out at politicians. Last week, Japanese voters surprised many analysts by turning out in unexpectedly high numbers—nearly 60 per cent—to deny Prime Minister Ryutaro Hashimoto’s Liberal Democratic Party the majority it sought in the Japanese parliament’s upper house, an elected version of Canada’s Senate. The LDP still controls the more powerful lower house, but its loss of 17 of the 61 upper house seats it was defending came as a body blow. The next day, Hashimoto announced his resignation— putting the party’s leadership and the future of its so-called Total Plan for economic reform up for grabs. That, in turn, sent waves of uncertainty rippling through global stock, bond and currency markets and helped push the Canadian dollar to record lows (page 22).

The volatility was expected to continue until Japanese politicians provide some clear sense of what they are willing to do—or not do— to help the world’s second-largest economy recover from its downward spiral. “Japan has to click into gear and move ahead with strong policies on what has become a massive crisis,” said Canadian analyst Kenneth Courtis, Tokyo-based chief economist for Deutsche Bank Group Asia Pacific. “If the situation is not reversed, then it is going to be very difficult to stabilize the rest of Asia.” Given Japan’s importance to the global economy, any political paralysis will be felt around the world, Courtis said. DRI, a Lexington, Mass.-based consultancy owned by the New York rating agency Standard & Poor, warned there was a one-in-three chance of a “worse-case scenario”: that Japan’s recession could spread to the United States by 1999.

Japan’s problem is not money; it has plenty of that. One-third of the world’s savings is in Japanese hands, much of it tied up in the citizenry’s famous post office accounts, which pay virtually no interest but are regarded as rock solid. The nation is also the world’s largest creditor, holding 23 per cent of all U.S. government securities in foreign hands, a stash valued at $430 billion. The challenge facing Japan is how to kickstart the stagnant economy—which most foreign analysts believe requires massive deregulation, sweeping financial reform and a significant tax cut—without triggering political turmoil.

Over the past five years, the efforts by Hashimoto and his predecessors have ranged from tepid attempts at deregulation to a variety of measures aimed at shoring up the increasingly weak banks. On the eve of the election, the LDP announced a new initiative to cull the staggering $800 billion in bad loans still carried on the books of the 18 largest banks, much of it left over from the overheated lending of the late-1980s “bubble economy.” That must be done without bringing the country’s debtors, including near-bankrupt East Asian nations such as Thailand, South Korea and Indonesia, to their fiscal knees. And after vacillating in his trademark fashion, Hashimoto also went to the polls promising a permanent tax cut.

Non-Japanese observers were quick to interpret the election results as a sign that the voters want their leaders to pick up this pace, perhaps even adopting an American-style sink-or-swim approach to economic restructuring. That could include letting some banks go out of business and putting more people out of work. The Japanese view, however, is less cut-and-dried. Unemployment statistics notwithstanding, Japanese living standards remain good. The high savings rate, which has increased during this time of crisis, means people feel secure in the long run. Many are still unwilling to reject the economic and social models that served them so well for so long. “There is an overall reluctance to follow the United States when you see such problems there, like high crime and the vast gap between the rich and the poor,” says Takeshi Inoguchi, a political scientist at Tokyo University. Japan’s commercial elite continues to maintain that the country cannot cope without government intervention. “The fall must be gentle, and depositors must be protected as much as possible,” saysTakashi Imai, chairman of the powerful Keidanren business association. “This is the Japanese way.”

That said, however, election analysts saw a powerful message in the results. “Voters are saying: ‘Enough is enough; we are sick and tired of this,’ ” said Minoru Morita, an independent political writer. “People are showing politicians that they are angry,” added socialissues commentator Eiko Oya. “They are saying that if things stay as they are, then Japan will sink. The people will support them if they are sure reforms will be enacted and revitalize the country.” What happens next depends on who the LDP chooses to succeed 61year-old Hashimoto later this month. Last week, a half-dozen names were put forward, ranging from Foreign Minister Keizo Obuchi, 61, whose policies and approach differ little from Hashimoto’s (Obuchi’s rumored candidacy drove the yen down) to dark horse and foreign favorite Seiroku Kajiyama, 72, who wants insolvent banks to close down (his potential involvement drove the yen back up). Japanese

analysts say Kajiyama has the best leadership abilities, but power brokers in the LDP prefer Obuchi because he is viewed as easier to control.

Younger party members, on the other hand, would prefer to see power pass to a member of their generation. Their favorite is Junichiro Koizumi, in his 50s, a charismatic campaigner with dramatic new ideas that include the privatization of the government-run post office savings accounts. In Koizumi’s view, this could go a long way towards solving could go a long way towards solving the country’s financial crisis because Japanese could be counted on to bail out their own economy by investing their formidable savings in national and local businesses.

But with the yen falling and domestic banks shaky, such Japan-first verities are already under strain. One product selling like hotcakes this summer is any book explaining how to set up a U.S.-dollar account. “Some days outside Citibank, people are lined up around the block,” says Rob Tran of Virtual Expat, a Torontobased company offering business services to foreigners trading with Japan. Overseas mutual funds are gaining popularity as well. Japan’s politicians may dither about change, but as last week’s election showed, its people are forcing it on them.

Japan's rise and fall

After top industrial nations agreed in the 1985 "Plaza Accord” in New York City that the U.S. dollar should fall, the yen took off. So did the Nikkei stock index, riding the real estate fuelled “bubble” economy of the late 1980s. The stock bubble burst in 1990 as Japan headed into recession. But the yen, buoyed by trade surpluses, stayed strong until 1995, when alarmed Western nations decreed it was too high. Now, they are worried it could fall too far.

With SUVENDRINIKAKUCHI in Tokyo

SUVENDRINI KAKUCHI