Japan: Austerity May Hobble Reform

It's beginning to look as though Prime Minister Ryutaro Hashimoto is serious about reforming Japan's financial system. Over the past couple of months, he has announced several measures to open up the banking, brokerage, and insurance industries to foreign competition. However, it has taken a while for the message to sink in. Now, the stocks of numerous companies in Japan's heretofore protected financial markets are nose-diving, pulling the Nikkei down yet again. Significantly, though, a group of highly competitive multinational companies, including Toyota, Honda, and Sony, have held up during the market sell-off.

The domestically oriented stocks are all the more likely to be unloaded for another reason: Japan's continued policy of fiscal austerity is likely to hit them a good deal harder than it will their multinational competitors, who can always spread their risks across the globe. The Japanese economy is still weak, and fiscal austerity at this time is certain to stall recovery. However, the ambitious restructuring in the financial industry now promises to take place against such a backdrop of fiscal austerity, with the sales tax rising to 5% from 3%, spending trimmed, and a planned rebate on income taxes repealed.

It looks to be a ham-handed plan, especially since the otherwise welcome reforms are certain to claim some corporate victims. Better to open up the financial markets to competition and ease the way with less austerity.

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