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JAPAN -From rags to riches to rags again in three generations?

This week as the Nikkei stood at 12,000, the level it hit in 1986 before the bubble developed momentum, Japan seemed to be diving deeper into the unknown and an air of panic enveloped the body politic as the news darkens by the day.

Moody's downgrades Japanese paper for the first time. The country seems headed right back into recession. Unemployment reaches record levels for Japan (albeit low by Western standards). Finance Minister Kiichi Miyazawa intones that "the public finances were approaching a state of collapse". Governor Maseru Hayami of the Bank of Japan indicates that the zero interest rate policy is back on the agenda. Indeed, for the first time he indicates his willingness, under certain circumstances, to both depreciation in the yen's value and to meeting quantified money creation goals; i.e., stimulating some inflation.

The ruling LDP Government is struggling to get its annual budget through the Diet by the end of March and at the same time is reported to cooking up its tenth "stimulus" package of public works schemes, as the budget deficit grows. The public debt has now reached 160 percent of GDP - and that's without counting the unfunded social security liabilities of the country's greying population.

Political paralysis grips as the hapless Prime Minister Mori's popularity ratings plummet to 6 percent but he is trying to hang on till closer to the Diet elections in July. Why, it is hard to imagine.

The LDP knives are out for Mori. But changing him for another LDP placeman will change nothing. The problem is deep and systemic and will only be changed with a new generation of leaders not beholden to the present set of interest groups: rural interests and the construction industry in particular. The system that created the miracle of Japanese industrialisation after World War II is in urgent need of modernisation and adaptation for the 21st Century. The present set-up does not meet the needs of modern Japan's urban dwellers or, most particularly, the young and entrepreneurial who do not wish to be saririman and want to build a new-economy Japan.

Changing Japan will be difficult. The vested interests are enormously strong. The country is still rich and since it is increasingly elderly, it is very conservative. Japan should have spent the last decade focussing on the future building industries that will service the elderly; deregulating, modernising its education system and setting off the entrepreneurial instincts of its multi-talented populace. Instead, it has spent the time bailing out the dinosaurs of the past. A huge debt has been created that will have to be serviced. It will act as a drag on the economy unless it is wiped out by inflation.

The choices facing the country are daunting. The LDP will almost certainly find itself overwhelmed by them. But Japan can make dramatic changes as it did after the Meiji revolution or after World War II. Eventually, new politicians may arise, such as Governor Isihara of Tokyo, perhaps with a more nationalistic agenda aimed at standing firm to a growing threat from China and wresting economic and political control from the over-powerful bureaucracy.

But that is all in the future. In the interim avoid the yen. When there is the possibility of real change in Japan then it will be an outstanding investment opportunity. Just now it's a trading punt.

William R. Thomson                               10 March 2001
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