Japan’s ‘grand experiment’ unsettles Big Business

IN the boardrooms of Japan’s top corporations can be heard the chuckles of disbelief over the new government’s people-first agenda to jump-start the economy. The sniggers, however, soon give way to a sober realization among members of the so-called Keidanren: the old ways that gave birth to, and nurtured Japan Inc., may soon vanish.

That is because the odds of the new government’s economic gamble paying off may be slim, risking Japan’s slide into ruin.

“Fraternity,” blurted an amused Atsushi Saito, referring to Prime Minister Yukio Hatoyama’s bedrock for a new Japan.

The president of the Tokyo Stock Exchange could barely hide his skepticism, as Asia’s biggest stock market in late October still hasn’t joined Wall Street’s rebound from the Lehman Brothers collapse.

The Topix was at 900 points, or way below its peak of above 2,000 points in the 1970s when the market rode on the export boom of high-tech Japan Inc.

“The new government’s proposal has not been digested very well, so the stock market is in a puzzle,” Saito said.

For the bourse’s chief executive officer, the “puzzle” of why Japan has yet to recover from a financial crisis that emanated from the Anglo-Saxon world can be explained by the new government’s thrust.

Shift to domestic-oriented economy

What Saito means is the Hatoyama government’s planned shift from an export-led to a domestic market-oriented economy.

The shift is backed by a popular mandate, after the left-wing coalition led by Hatoyama’s Democratic Party of Japan (DPJ) won overwhelmingly with more than 300 out of the close to 500 seats of the Lower House during elections held two months ago.

But this envisioned shift is unnerving the Tokyo bourse, whose bellwether listed firms had prospered under the old economic tack pursued by successive governments of the Liberal Democratic Party (LDP).

“The stock market was one outstanding indicator that the export-led model worked,” Saito said.

To be sure, exports comprise only 17 percent of Japanese gross domestic product (GDP), or about half the 37-percent share in the Philippines.

But Japan’s phenomenal economic growth up until the 1980s owed a lot to its export powerhouse, particularly its automotive and electronics industries. During that period, Japanese exports grew by double-digit rates.

This aggressive push abroad has turned companies like Toyota and Sony into household names around the world, and darlings of the Tokyo stock market.

180-degree turn on fiscal reform

Alongside the turn toward the domestic front, the new government plans to scale back on public infrastructure expenditures so it could bankroll its social welfare spending.

Reflecting its cozy relationship with Big Business, past LDP governments enacted a supplementary budget whenever the Japanese economy faltered, especially during the 1990s or that country’s so-called lost decade, when the economy tanked to the low single-digit growth rates that persist until now.

Actually, public infrastructure spending had been falling since the LDP’s Junichiro Koizumi became prime minister in 2001, part of his government’s structural reform package to rouse the Japanese economy from its slump.

Hatoyama plans to make a 180-degree turn as far as fiscal reform is concerned. This is meant to address a popular clamor among the Japanese to spread the fruits of growth more equitably than what previous LDP governments had done.

Indeed, this clamor explains Koizumi’s landslide victory in 2005 and his equally sudden fall from grace, as ordinary Japanese frustration grew over their failure to partake of the promised dividends of structural reform.

In its manifesto, the DPJ said it would raise state subsidies for households, ranging from child allowances to school scholarships, agriculture income support, employment insurance, higher minimum wages, bigger allocations to local governments and a minimum pension.

To raise funds for its welfare program, the Hatoyama government plans to cut down on wasteful spending of taxpayers’ money—a cue to the business sector that government infrastructure projects such as roads would have to take a backseat.

Upon assuming the reins of government, the new administration cut the supplementary budget approved by the previous LDP-led regime.

Undermining green technology

For companies like Mitsubishi Motors, the DPJ’s reduction of the supplementary budget, as well as its overall thrust of shifting state subsidy directly to households flies in the face of the new government’s push for green industries.

The Japanese carmaker recently broke ground, mass-producing its electric vehicle called the i-MIEV. A response to Japan’s commitment to bring down green house gas (GHG) emissions under the Kyoto Protocol, Mitsubishi Motors’ initiative is also meant to harness first-mover advantages—thanks in large part to generous subsidies from the government.

Like the hybrid variants of its competitors, the i-MIEV comes with a prohibitive sticker price of 4.6 million yen (roughly P2.4 million), but state subsidy brings down the retail price by as much as half, including exemptions from the vehicle purchase and weight taxes—Japan’s version of the value-added and excise taxes specifically for cars.

Masataka Saito, general manager for EV Business Development, admits the company’s sales target of 1,400 units this year and 5,000 units next year are premised on the state subsidy and tax exemption provided by the previous LDP government.

The car executive said bringing down the cost of producing the i-MIEV would depend on market demand, which in turn hinges on continued government support.

“The overseas market for EV depends on the existence of the subsidy,” he said, when asked if the company would sell the i-MIEV to Southeast Asia, if not produce the model in its assembly plants in countries like the Philippines.

Yoshihito Iwama, director of the Environmental Policy Bureau of Nippon Keidanren, said the transfer of GHG-reducing technology to developing countries would require substantial state support for the Japanese corporate sector’s ongoing innovation efforts.

Given the Hatoyama government’s aggressive target of reducing green house gas emissions by 25 percent come 2020 from 1990 levels, Iwama estimates the cost to Japan at $476 a ton, or eight-fold the cost for the European Union or the US.

Turn away from textbook model

Junichiro Takeuchi, chief forecaster of the Japan Center for Economic Research (JCER), said the Hatoyama government “clearly changed economic policy,” as captured by the new administration’s slogan of “investment not to concrete or construction of roads, but to households or the people.”

“This is a dramatic change of the economic system,” said the former Bank of Japan economist.

The change involves a turn away from the textbook transmission model, wherein government props up the corporate sector, whose profitability would lead to higher take-home pay for households. Through its huge welfare-spending plan, the Hatoyama government wants to do away with the so-called trickle down effect and directly prop up the household sector.

“The new government stresses the direct benefits to households based on the view that existing firms-to-household channels have been ineffective for the long time,” Takeuchi said.

Indeed, for emerging Asian economies that piggy-backed on Japan’s flying geese strategy, the Hatoyama government’s twin shift toward the domestic sector and welfare spending would mean that Japanese companies would no longer enjoy generous state subsidy for their ventures abroad.

Japan is the Philippines’ second-biggest source of foreign direct investment (FDI). This is evident from the huge number of Japanese electronics and automotive companies that have set up assembly operations in the export processing zones in and around Metro Manila and in key urban centers like Clark, Subic and Cebu.

Reflecting Manila’s role in the Japanese multinational companies’ regional production networks, Tokyo is the Philippines’ biggest source of imports, and its second largest export market next to the US.

Anxiety over job security, pensions

Takeuchi calls the Hatoyama government’s policy a “grand experiment.”

“If we succeed, we realize ‘true’ economic expansion. However, if a failure, a huge fiscal deficit will add on the critical level of the fiscal debt,” the economist said.

Japan’s budget deficit hovers at around 6 percent of gross domestic product (GDP), or three times that of the US. Tokyo’s debt looms at 160 percent of its national economic output, as against the 65 percent for the US.

To get an idea of how unsustainable this is, the Philippines is already hard-pressed with its projected 3.2-percent deficit-to-GDP ratio, forcing the government to raise borrowing from both commercial sources and official development assistance (ODA).

Takeuchi admits that the chances of Japan’s “grand experiment” turning in the much sought-after results are not so good “given the anxiety over job security and old-age pensions.”

Unlike the Philippines, Japan’s population is fast growing old, as the anxiety over poor economic prospects has discouraged childbirth. With fewer additions to the working-age segment, Japan would soon find it difficult to finance the pension requirements of an aging society, much less the public investment spending required to keep Japan’s high-tech edge.

Fraught with inconsistency

The DPJ plan to create a child allowance is meant to reverse this demographic trend and increase fertility, while its envisioned support to the education sector would prop up Japan’s productivity.

But the Hatoyama government’s agenda is fraught with inconsistencies.

Takeuchi points out the DPJ’s plan to remove the highway toll and the gasoline tax, which runs counter to the government’s avowed push for green technology.

In the foreseeable future, exports would remain a more viable way out of Japan’s current slump, he said.

The economist said the keys to this scenario are a correction of the yen’s appreciation and the continued rebound in emerging Asia led by China and the Association of Southeast Asian Nations.

And in so far as Japan’s future is tied to the sustained recovery of developing Asia, he said this would require Tokyo to maintain if not increase its ODA—an uncertain development given the Hatoyama government’s increased domestic spending tack.

Takeuchi said official development assistance is crucial to building up the productive potential of Japan’s export markets in the developing world in so far as available infrastructure would enable Japanese companies to locate their manufacturing operations in these low-cost areas.

Under the LDP-led regime, ODA had fallen in line with its structural reforms. This is true for the Philippines, even as Japan remains Manila’s biggest source of donor aid.

Same growth under new model?

The Tokyo stock market’s chief executive officer doubts whether the shift to domestic human-capital spending—what he calls “warm-hearted capitalism”—could lift Japan out of its rut.

The one-million-yen question for Saito—as for many corporate executives—is whether Japan “can maintain the same growth under the new economic model” as it did when exports and public infrastructure spending took the lead.

He is hopeful that the new government’s “pro-human being investment” would succeed, citing the promise of the Japanese corporate sector’s increasing take up of green technology.

But as cited above, even this business initiative is likely to face hurdles.

“Hatoyama promised four years to change the structure of Japan. Whether the stock market—or Japan—can endure is another point,” Saito said. –Arnold S. Tenorio, Business Editor, Manila Times