Japan Can't Ignore Its Recession Away

Economic fundamentals in Japan are bad and getting worse. Output is falling, profits are collapsing, the stock market is plummeting, and, for the first time in decades, people are truly afraid for their jobs. Secure lifetime employment is becoming a memory of the past.

Yet the government is doing little. Prime Minister Morihiro Hosokawa continues to delay government plans to boost the economy, instead focusing on voting reform. That's what Hosokawa was primarily elected to do--to remake Japan's corrupt political system. But he is playing with fire by underestimating the depth of the country's economic malaise.

The soaring yen has set off a massive restructuring not unlike what occurred in the U.S. during the '80s. Companies that built huge capacity over decades of expansion suddenly find themselves in need of serious downsizing. The high yen has forced them to shift factories to lower-cost countries.

Although unemployment is officially listed at 2.6%, Japanese government studies show that up to 16% of the total labor force may be redundant. Pressure is increasing to break Japan's social contract and cut excess labor.

If Japan is to avoid further economic stagnation and large-scale social dislocation, it must boost domestic demand fast. But government policy is in deadlock. Hosokawa is promoting a modest income-tax cut, but the Finance Ministry wants to offset it with an equivalent consumption-tax increase later.

Meanwhile, calls go unheeded for deregulation to up competition and pass on the benefits of the strong yen to consumers. Bureaucrats are again quashing any moves forward.

The Nikkei stock average is down 15% since October and nearly 60% since '89. The talk in Tokyo is that the slide simply reflects the Finance Ministry's decision not to support the market at this time. Insiders say the ministry will support the market again in the spring, as it always does.

But maybe this time, for the first time, the Nikkei's sagging fortunes reflect deep structural problems in the Japanese economy. The Hosokawa government would be prudent to act quickly--with a big income-tax cut and serious deregulation of the economy.

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