Japan’s Economic Doldrums: A Potential Route to Real Reforms

It has become abundantly clear that the Japanese economy has been in the doldrums for virtually a decade. Recent data indicates that recessionary forces continue to pervade the economy. Investment spending by corporations is either negative or non-existent. Consumers continue to refrain from consumption turning instead to increased rates of saving—and some private saving is now turning to foreign asset markets instead of domestic markets. Estimates of non-performing loans in the banking system continue to be raised and the addition of (net) new non-performing loans continues. Bankruptcies are growing in small and medium sized firms. While some large firms are beginning to restructure slowly, continued commercial bank lending is propping others up.

Clearly the domestic economy needs some sort of ‘shock’ to rekindle confidence on the part of consumers and business (and I would argue the government itself) and to kick start the economy. The question is what sort of shock will it take? Will the shock come after a serious financial crisis? Will the shock come from the failure of several large sized corporations? Will the shock come from a voter lead rejection of the LDP and its approach to economic reforms? Or will the shock come from outside Japan? And will it be a ‘positive’ or a ‘negative’ shock?

After more than ten years of significant underperformance in the Japanese economy, questions are being raised about whether or not there are any realistic policy options available to Japanese authorities that will put the economy on a sustained route to reform. Moreover, questions are being raised about the willingness of policymakers to accept the risks associated with needed policy change. Additionally some are wondering if the political associations of the LDP with ‘old Japan’ industrial and agricultural sectors will prevent it from being an agent of change in today’s economy.