Japan: Not So Miraculous Now

Japan, once the envy of the world for its economic miracle, is now mired in its worst recession since the end of World War II. Ripples of these troubles are being felt far away as Japanese consumers and companies grow tightfisted with their purchases and investments. Aggressive government moves to stimulate domestic spending would be in the interests of both Japan and its many trading partners.

From the U.S. perspective, Prime Minister Morihiro Hosokawa is Japan’s man of the hour. He came to office--the first prime minister in 38 years who did not represent the Liberal Democratic Party--promising political reform, government efficiency, deregulation and economic revival. He has demonstrated a taste for bucking the status quo, an exceedingly difficult task in consensus-driven Japan.

However, the deepening economic problems could derail--or at the least detract from--his pursuit of his No. 1 priority, political reform. His coalition government succeeded in getting his political reforms through the lower house of Parliament earlier this month, but the package faces a tough test in the upper house next month. Hosokawa has vowed to step down if the reforms are not enacted by year’s end.

Meanwhile, the unrelentingly bad economic news has moved Hosokawa’s government to talk of an income tax cut. Industrial production is down. Companies are wrestling with structural changes because of the stronger yen. The Tokyo stock market has lost nearly 20% of its value in the last month; on Monday the Nikkei hit its lowest level of the year. Both manufacturers’ profits and bank profits are down. Officially, Japan’s unemployment is at 2.5%, but the figure would be 6.5% if it were calculated according to U.S. standards. Auto exports were down 25% in October.

Japanese bureaucrats oppose a tax cut, fearing it would result in a budget deficit. To neutralize a tax reduction, they want an eventual increase in the national consumption tax.

Hosokawa continues to ride high in the popularity polls. He should use that political capital to press for a big tax cut and other economic initiatives as well as to make a final push for his political reforms. That would help spur consumer spending in Japan and drive up demand for imports, including goods from the United States.