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When Japan has a cold,
Hawaii sneezes, tooJAPAN'S economic woes reverberate in Hawaii, where we learned to appreciate her big-spending shoppers, resort developers, real-estate speculators and 747-loads of tourists.
When Japan's bubble burst, Hawaii slid into a decade-long recession while the mainland U.S. remained largely unscathed.
"Then came Sept. 11," writes Greg Ip in The Wall Street Journal. "The U.S. suffered its worst one-month job loss in 21 years." Suddenly, "the possibility of living Japan's economic nightmare was no longer an academic discussion."
The Federal Reserve had little left to stimulate a recovery, since inflation and the federal funds rate were already almost at rock bottom. Still, in seven weeks the Fed cut rates three times, each time by a half-percent, to historic lows.
In response, the U.S. economy rebounded. Consumers couldn't resist deals like zero-interest car loans. The Japanese nightmare was avoided.
Japan is in a depression, a sustained and sharp output decline. Fixing the Japanese economy isn't impossible, says Sumner La Croix, head of the University of Hawaii's Department of Economics and senior East-West Center research fellow.
"There are reasons for optimism. It's wrong to presume it can't be done," he says. "The political implementation, however, is difficult."
Japan has a centuries-old tradition of unprecedented change. Innovations since World War II have been sweeping. Her institutions are new and malleable.
On Tuesday, however, the Bank of Japan stood pat despite government calls for monetary easing to support the economy and persistent consumer price declines.
Unprecedented change is now critical with many local governments and seven of 20 life insurance companies bankrupt, 25 percent of bank loans "non-performing," a 2001 stock market crash of 30 percent, rising unemployment and persistently falling prices.
Previous administrations treated the symptoms with massive public works spending, lower interest rates, deregulation, sweeping financial industry modernization and a transfusion of cash to prop up the banks. The patient was alive, but in guarded condition and subject to relapses.
THE KOIZUMI government tried privatizing the postal savings bank, slashing government budget deficits and reforming major semi-public corporations, but the heart of the problem is the banking system, which hasn't shown a profit since 1993.
The bloated, overgrown banking system got into trouble in the 1980s, La Croix says. When the financial system was liberalized, money moved to new markets from banks. Left scrambling for business, they made many ill-advised loans.
In Japan, money to pay back loans is already worth more than what was borrowed. Hence, interest rates are low. So low, La Croix says, that companies that should be dead can borrow to ward off the inevitable. These "zombie companies" compete with healthy businesses, dragging them down, too.
While Kmart declared bankruptcy, restructured and moved on, Daiei should be put out of its misery but keeps going. "It's a zombie," La Croix says.
LA CROIX prescribes ending loans to zombies and requiring banks to sell off bad loans and collateral immediately. Forget about depressing the markets by dumping these assets. "There's never any good time," he says. "Get it over with and put it behind you."
Therapies should include shrinking large, insolvent banks, recapitalizing those that can also attract private investment, further deregulation and privatization, decoupling the banks and insurance companies and ending subsidies, like the 30 to 40 cents a fruit orange growers get.
International trade talks also need to be rebooted and the U.S. should try to come up with some serious new trade proposals, La Croix says.
However, he says, "The only way I know to stop deflation is to fire Masaru Hayami, the head of the Bank of Japan."
John Flanagan is the Star-Bulletin's contributing editor.
He can be reached at: jflanagan@starbulletin.com.