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Monday, March 10, 2003

Japan: Which Side Are You ON?

I'm posting this piece from Morgan Stanley's Takehiro Sato since, apart from anything else, it is a hoot. Trying to make sense of what happens in Japan is difficult at the best of times, but when a market oriented party starts to socialise the economy, and the ex-communists begin to demand market based measures, well, I think we move from the world of the sublime to that of the ridiculous. Sato - to steal a phrase from Brad Delong - certainly seems to be 'banging his head against the wall' here. I hope it isn't too painful.

Let’s look at recent remarks by an opposition party official regarding the Industrial Revitalization Corporation of Japan (IRCJ): “The plan put forward by the government calls for dividing bank lending that has concern for recoverability into two categories, with the genuinely bad loan going to the RCC and other watch list loan being handled by the IRCJ. Yet banks should be responsible for the job of lending. In this plan, however, the government-owned corporation will be assuming the responsibility of banks and shouldering the credit risk and then using public capital to cover losses if companies fail, instead of the banks. Rather, banks should be doing the job of industrial revitalization. It does not seem appropriate for such a special public corporation to take on this role.”

Before proceeding, it should be noted that I personally am not a supporter of this party and have no intention of giving it a boost. The party’s core principles call for liberation from the exploitation of capitalism and construction of a planned economy through socializing the means of production. What is stated here, however, is mostly correct regardless of the party’s ideology.

It is rather confusing in Japan that the right-wing “conservative” party is pressing for revision of the national constitution, while the left-wing “reformist” party wants to leave the current constitution intact, for example. We find a similarly ironic contradiction in the party that stands for “liberalism” relying on government control in both macro and micro policy, while the socialist party fights for market principles and resists the takeover of excessively indebted companies by such a government-owned entity. Currently, a conservative to center-right coalition cabinet backs a socialistic economy despite the prime minister’s resolution, while left-wing opposition parties criticize these policies, therefore calling for a market mechanism. Such a distorted situation came to be a normal state of affairs, and the PM has aptly acknowledged that Japan has a socialistic economy along the lines of the former Soviet Union and East Germany.

The IRCJ runs the risk of being transformed into a holding ground for excessively indebted companies and classic example of socialistic policy, if political interference were to be allowed. Likewise, policymakers seek to prevent as much as possible an expansion of social inequalities from a hard-landing scenario. Furthermore, the core capitalistic concept of “profit-making” is seen to be nearly rejected, perhaps from some manifestation of Confucian mentality, which makes the groundwork for oriental ethics.

The most obvious example is banks. There have been policies that effectively reject profit-making by this sector through the Revitalization program which was aimed for the increase of lending to comparatively risky borrowers such as small and medium enterprises. Also, public opinion takes an extremely harsh view of bank profiting. In this sense, I have asserted that Japan’s banking business has been converted into a non-profit organization (NPO).
Source: Morgan Stanley Global Economic Forum

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