CRAIG T. KOJIMA / CKOJIMA@STARBULLETIN.COM University of Hawaii professor Sumner LaCroix blames Japan's one-party system for its resistance to economic reforms. Political reform will happen within five years, he says.

One-party system
blocks Japan reform,
professor says

Change is needed to pull the
country out of its mire, he says

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Star-Bulletin staff

The economic growth Japan posted in the first quarter won't last, according to a University of Hawaii economics professor, unless the country's underlying economic problems are addressed.

Drawing a parallel to Hawaii, Sumner La Croix said Japan's one-party system was largely to blame for its resistance to implementing reforms.

"In a one-party system it's harder to come up with reform," he said yesterday at the monthly meeting of the Hawaii Economic Association.

But La Croix, who is co-editor of "Japan's New Economy: Continuity and Change in the Twenty-First Century," disputed the notion that Japan is inherently rigid.

"The structural change in the post-World War II period has been enormous," he said.

For example, lifetime employment is looked at as a fixture, said La Croix, but it was only introduced during the war. "Japan didn't have lifetime employment in the '20s and '30s."

So some of the things perceived as intractable in its economy are fairly new and therefore vulnerable to change, he said.

"One of the things about an economy in depression is it puts out a pessimism about change," said La Croix. "We all know that pessimism from living in this state."

Japan has engaged in massive financial deregulation, but those efforts have been poorly prioritized or stopped short of completion, said La Croix.

A new area of focus is the insolvency rate, about 68 percent, of Fiscal Investment and Loan Programs, he said. The semi-private concerns are largely engaged in unprofitable public works projects. The magnitude of their bad debt amounts to 9 percent of the country's gross domestic product, said La Croix. That is in addition to the 14 percent to 35 percent of GDP estimated to be tied up in bad bank loans.

The government's effort to solve the problem of throwing more public money away on these firms resulted in those same funds being filtered to the FILPs, as they are called, through the open market, said La Croix. The next step is to privatize the FILPs, he said.

"It's kind of nice to be in that situation where you've done five of the six steps. But it's that sixth step that pushes you over the edge," he said. "In Hawaii we often get to three of the six steps."

Two largely ignored priorities are deflation and "zombie firms," said La Croix, who would like to see Bank of Japan Governor Masaru Hayami out of a job.

The central bank has allowed deflation to continue for far too long, to the detriment of the country, said La Croix.

"Deflation is the number one problem in Japan," he said, adding that it exacerbates the loan problem because zero interest masks bad loans and deflation makes debt more burdensome. "Running inflation at 5 or 6 percent a year for a couple of years would be a service to the Japanese economy."

But he said this policy meets resistance among the old guard, who remember the hyperinflation of the post-war era and fear its return.

"Getting rid of the living dead zombie firms needs to be one of the top priorities," said La Croix. "They are lowering prices and competing against healthy firms."

He used the examples of Kmart and Daiei to illustrate the difference in American and Japanese approaches to troubled companies.

Kmart gets into trouble in a competitive sector, files for bankruptcy, engages in a massive restructuring and has a chance to turn around, said La Croix.

Daiei gets into trouble in a competitive sector, admits to $19 billion in loans it can't pay, and its Japan banks roll over the debt, he said.

"This is a firm that ought to go bankrupt," said La Croix.