MARKET REFORM FOR ECONOMIC REVIVAL

Over the first three quarters of 1998 the Japanese economy registered negative growth from the previous quarter. The fourth quarter should show an improvement over the third, the government says, because demand for items like personal computers and small cars has expanded. There are two reasons for being wary of this view, however. One is that while sales may have gone up, the increase is mainly in sales of low-priced items, so there may be little or no increase in value added. It may be that consumption is on the rise only in the big retail outlets that are offering cut-rate prices to drum up business, while the popularity of small cars (defined as those with a displacement of under 660 cubic centimeters) may relate to their having been made slightly larger and roomier. The increase in consumption may, accordingly, be a temporary affair that does little to get the economy going again.

The other reason relates to capital spending. Orders for machinery—a leading indicator of plant and equipment investment—have remained far below the previous year’s levels for more than 12 months now, and there are signs that they have yet to reach the bottom of the trough. This means we cannot be optimistic about a rebound in corporate investment in 1999.

Despite the poor state of the real economy, many people think the worst is behind us. This is because the financial crisis appears to be ending. The threat of further bank failures has receded because the government is injecting cash into banks. Bank lending is still contracting, however. According to the Bank of Japan’s November 1998 survey of the short-term outlook, an increased number of companies replied that banks would get stricter about loaning out money. Smaller companies in particular have been complaining. On the monetary front, the pros and cons of getting more funds into circulation are being hotly debated. With the government issuing more bonds to cover the growing budget deficit, long-term interest rates have been on the rise. Some say the Bank of Japan should counter this by directly underwriting government bond issues and engaging in open-market operations to increase the money supply.

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The monetary base controlled by the BOJ has been growing at an 8%-9% rate on a year-on-year basis since 1998. But the broadly defined currency supply, which includes bank loans, has increased at only a 3%-4% rate. Moreover, the velocity of currency circulation has been decelerating, and this is one reason why more currency will not necessarily power an economic revival. Families and companies have lost confidence in the soundness of their future financial situation. Individuals are worried about employment security, the graying of the population, and the reliability of the pension system. Businesses, meanwhile, have been cutting down on plant and equipment investment and are nervous about stepping up their outlays.

The economist Paul Krugman judges that Japan has been caught in a “liquidity trap,” and I must say I agree. If a greater volume of money is not accompanied by faster velocity in its circulation, the money will just be put into storage. A brighter picture of where the economy is headed must be imprinted on the public mind. Confidence in the economy must be quickly reinforced. And thought must be given to whether it is Japanese-style management itself that has gone wrong.

From this perspective, let me now introduce the articles in this section. The dialogue between Ushio Jirô and Ronald Dore centers on what should be changed or left intact in Japanese management. A sympathetic observer of the Japanese style of management for many years, Dore is concerned about the current tendency to put top priority on the interests of shareholders at the cost of the interests of employees. He sees no need for catering only to shareholders. Corporations that do not bow to the wishes of their shareholders may have trouble raising money in global capital markets, since taking a shareholder-first approach is becoming a “global standard” these days, but this should not bother Japanese firms, since the country has a wealth of domestic savings.

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Dore also gives Japanese companies good marks for paying out steady dividends to shareholders even when they are operating in the red. He is critical of proposals for the introduction of a Japanese version of the United States’ 401(k) plans, a form of saving for retirement under which people build up their own funds and are responsible for investing them; he suggests it will be difficult for individuals to make rational investment decisions (when even experts’ opinions diverge so widely). He winds up with the message that Japan should maintain its “main-bank system,” even if not as prominently as in the past, and that companies should continue to be managed by directors who have risen up through the ranks and to place priority on the interests of their employees, motivating them with a seniority-based promotion system.

Ushio’s feeling is that Japan must not remain content with the good performance of its management style in the past. In particular, he calls for greater emphasis on capital efficiency, and he suggests that the degree of importance of employees will depend on the type of company. There can be no disagreement with Dore’s calls for improvement in business operations, managerial strategies, and corporate systems. But I believe Japanese firms must also clarify the responsibilities of their executives.

Hashimoto Hisayoshi, the author of the next article, worked for a while as a technical expert on policy matters for the Ministry of International Trade and Industry, later received a teaching degree in the field of policy research, and has since been busily studying the situation of small companies. Riding his motorbike, he has been calling on small firms mainly in Tokyo’s Ôta Ward. From what he has seen, he views such firms as the gems of the Japanese economy. He says that they should not be wailing about the credit crunch; the time is ripe for them to make full use of their know-how, technologies, and personal connections.

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More specifically, he proposes that they recruit and train personnel, create attractive workplaces, venture into new fields, upgrade their information systems, and engage in exchange with people working in other industries and in other ways step up external cooperation. The operators of small firms need to keep pursuing their dreams and to hold firm to their spirit of adventure, he emphasizes. Japanese companies must correctly evaluate their track record of accomplishments in order to restore their confidence and vitality.

Apart from the domestic problems of its companies, Japan must give thought to the international monetary system. The realization that capital flows among countries can cause volatility in exchange rates was reinforced by the outbreak of the Asian currency crisis in 1997. Europe has chosen not to follow the American orthodoxy of floating exchange rates; instead it has opted for stability of currencies within the region, and the culmination of this movement is the euro, whose introduction began in January 1999.

The article by Gyohten Toyoo focuses on the impact of the euro on Japan and the lessons to be learned from it. The euro will integrate and expand Europe’s money and capital markets. The new currency will not rival the dollar quickly, but it has great potential. Whether it lives up to its potential will depend on the European Central Bank’s management of monetary policy, individual governments’ fiscal policy, and other economic factors. But sooner or later the euro is likely to be on a par with the dollar as an international currency, and that raises concerns about the yen.

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Gyohten believes that if the Japanese currency does not conform to international standards, it will fall far behind the dollar and the euro in transactions. Since the advent of the Asian currency crisis, there have been calls for a common Asian currency. But as Gyohten points out, if the yen can play a role commensurate with Japan’s economic strength, demonstrating that it has merit as an asset, it will meet the expectations of East Asian countries. Toward this end, Tokyo’s financial markets will have to be reformed to meet global standards.

Talk about the possibilities of internationalizing the yen was often heard in the late 1980s, when Japan’s sustained expansion was creating its bubble economy. The boom in Tokyo’s financial markets generated demand for yen-denominated assets, but the currency’s internationalization was hampered because the buying and selling of these assets by non-Japanese residents had not been fully deregulated. Now Japan has set off its own Big Bang, and freedom in financial markets is on the rise. But public funds are being pumped into banks to get them back on their feet, and this move appears contradictory to the policy of creating conditions for deregulated markets and free competition. This inconsistency may undermine trust in our money and capital markets. For the yen to play a role as an international currency, trust in Japan’s financial system must be restored. (NARIAI Osamu, Professor, Reitaku University)

© 1999 Japan Echo Inc.