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Japan's victors set to abandon market reform


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POSTED: Tuesday, September 01, 2009

TOKYO » Japan's opposition party won an overwhelming victory at the polls on Sunday pledging to increase social welfare, better protect workers and do away with American-style, pro-market reforms to lead the country out of its long slump.

But while the presumptive prime minister, Yukio Hatoyama, rallied campaign crowds with his pledge to shift away from the “;excessive”; market reforms of recent years, many economists here say Japan may need more American-style deregulation and market-led growth, not less, to invigorate its stagnant economy.

“;Reform has become a bad word”; in Japanese politics, said Richard Jerram, chief economist for Japan at Macquarie Securities.

“;Japan is now more reluctant than ever to use market forces to raise productivity,”; he said. “;But these changes are crucial.”;

In a manuscript widely circulated in business and diplomatic circles, Hatoyama, the leader of the Democratic Party of Japan who stands to become prime minister when the party assumes power this month, railed against American-style capitalism as “;void of morals or moderation”;—a blight Japan must cast aside at all costs.

“;The recent economic crisis resulted from a way of thinking based on the idea that American-style free-market economics represents a universal and ideal economic order,”; Hatoyama wrote in a recent syndicated opinion article, first published in a Japanese monthly magazine and later carried by the online edition of The New York Times.

Hatoyama, however, seemed to back away from his tough language a day after his victory at the polls.

The op-ed article “;did not present an anti-American way of thinking over all,”; he told The Yomiuri Shimbun, Japan's largest daily newspaper.

The young party's defeat of the long-ruling Liberal Democrats, who have governed Japan for nearly its entire post-World War II history, comes amid a wider backlash against what many voters see here as damaging reforms championed by the long-serving former Prime Minister Junichiro Koizumi. The reforms, which coincided with a swing toward pro-market policies in the United States, included liberalizing Japan's rigid labor market and forcing banks to cut off support to heavily indebted “;zombie”; companies.

The Democrats argued that such measures, intended to snap the country out of a long period of slow or negative growth, may in fact have weakened the economy further. They also argue that overdependence on exports, as well as other close economic ties with the United States, has exposed Japan to the devastating effects of the global financial crisis.

“;We're in the midst of an economic crisis, and there's a feeling that the crisis originated in the United States, and it was the fault of American policymakers and that the countries are paying the price of policy errors,”; said Steven Vogel, political science professor at the University of California, Berkeley. “;There you have the makings of a very appealing political platform.”;

The Democrats are expected to form a coalition with the Socialists and the conservative People's New Party—smaller parties that are decidedly against market reform—which could reinforce this tendency toward government-led solutions to the economic crisis.

The Democrats' platform centers on initiatives like cash allowances for child-rearing families and lower gasoline taxes. Such policies could bring about the start of recovery by lifting Japan's flagging consumer spending.

The Democratic Party has also promised to wrest away power from ministerial bureaucrats to ensure that spending more closely reflects public needs. But the party's leaders have not had much to say about how to address productivity, or Japan's continuing battle with deflation, or the cloud of a huge public debt.

Japan may be famous for its ruthlessly efficient, competitive manufacturing industries—like Toyota's just-in-time production, in which parts are delivered just before assembly to keep inventory low. But its domestic service sector, which makes up 70 percent of the economy, is an overregulated, inefficient mess, businessmen and economists say.

The backlash against reform worries entrepreneurs like Hideo Sawada, who forced open Japan's cloistered domestic airline sector in 1998 with Skymark Airlines, its first new carrier in 43 years.

After years of delay by the Japanese government, Skymark received permission to fly just half a day before its first flight was due to depart. Eleven years later, the carrier has still not been granted a license for international flights.

“;To do anything new in Japan means dealing with a nightmare of licenses, rules and vested interests,”; Sawada said. “;For Japan to grow, and for it to stay competitive, it needs to get serious about opening up what are frankly backward sectors. I don't get the sense the Democrats see that as a priority.”;

Many outdated rules protect inefficient companies, while entrepreneurship is kept in check by cumbersome barriers. Economists say excessive government assistance to small and medium-size companies works to dampen competitive pressure.

The state of affairs is a legacy of an industrial policy, formed under the rule of the departing Liberal Democrats, that has long focused on honing the competitiveness of Japan's export-oriented manufacturing sector. The policies helped bring about Japan's rapid postwar economic growth and fed its bubble economy until its collapse in 1990. The rest of the economy, in contrast, has been relatively sheltered from both international and domestic competition.

Now, with a rapidly aging population and almost no immigration, Japan must increase its productivity, economists say.

“;If the population isn't growing, then there's no other way forward than for each worker to be more productive,”; said Hideo Kumano, economist at the Dai-Ichi Life Research Institute in Tokyo. “;But that's not happening, at least in most areas of the economy.”;

The fragility of Japan's export-oriented economy has been underlined in the global financial crisis: a collapse in Japan's overseas shipments amid falling demand for cars and gadgets caused an annualized 11.7 percent fall in the country's gross domestic product in the first three months of the year.

The economy rebounded 3.7 percent in the latest quarter, as overseas shipments picked up; but economists doubt whether that recovery, set off by stimulus spending worldwide, is sustainable.

Evidence of low productivity is everywhere in Japan: multiple workers crowd around cars at gas stations to clean windows and collect trash; the shift to information technology at Japanese offices is surprisingly slow, with workers still laboring over paper files and records.

Japan's jobless rate is at a record high of 5.7 percent, and it could be as high as 12 percent if not for a government subsidy program that encourages companies to keep surplus workers, according to a recent report by Nomura Securities.

“;The Democrats are veering off the reform path, but I don't see what will come in its place,”; Toshio Nagahisa, executive director of PHP Research Institute, a Tokyo-based research group, told a recent forum.

“;Right now, I find it hard to envision Japan's future.”;