For Japan, Economic Hope in Wall Street Bailout

By Blaine Harden
Washington Post Foreign Service
Monday, September 22, 2008

TOKYO, Sept. 22 -- Washington's bailout of Wall Street may also help bail out Japan, a nation hobbled by aimless leadership, punishing public debt, a dwindling workforce and growing weakness in the exports that power the world's second-largest economy.

"The very troubling international environment for Japan has become, virtually overnight, much brighter," said Ken Courtis, former vice chairman of Goldman Sachs Asia.

The bailout decreases chances that the United States will dip into a prolonged recession, which would further punish Japanese exports. The economy here began to shrink months before the market calamities of the past week, with a 0.6 percent contraction in the second quarter. It was the steepest decline in seven years, and the government predicts the slide will continue. The U.S. economy, by comparison, grew in the same period at an inflation-adjusted rate of 3.3 percent.

An official at the Bank of Japan said last week that the central bank's financial reserves and the country's economy are so inextricably tied to the fortunes of the United States that Japan simply cannot afford to criticize Washington or consider withdrawing its roughly $860 billion in U.S. investments, mostly Treasury bonds.

"So that is why we always have to be very careful," said Hidehiko Sogano, an associate finance director at the Bank of Japan.

Deference to the United States on financial matters has dovetailed with political paralysis in Tokyo. Two ineffectual and deeply unpopular prime ministers have come and gone in the past two years. Each attempted little, accomplished less and abruptly quit after less than 12 months in office. Both failed to move legislation through a parliament frozen by political division.

A new prime minister, former foreign minister Taro Aso, is expected to be named Monday. But until parliament is dissolved and a new election held, he faces the same parliamentary roadblock as his two hapless predecessors.

Japan's ace in the hole for feckless leadership is the world's largest pile of cash. It has about $15 trillion in personal financial assets, about $8 trillion of it on deposit in banks. Many Japanese banks and major corporations also have enormous cash reserves, which would enable many of them to weather a prolonged slump in the world economy.

"We have a lot of cash at a time when cash is king," said Oki Matsumoto, chief executive officer of Monex Group, one of Japan's largest online brokers. "We can survive anything. In that way, we are much better off than any other country."

Still, with political paralysis as the watchwords of Japan's current predicament, Washington's aggressive bailout plan is a potentially pivotal breakthrough in efforts to revive and sustain the growth of the Japanese economy.

China's move last week to lower interest rates and bank reserve requirements is also likely to help Japan. China has replaced the United States as Japan's biggest trading partner.

Japan has to thread a needle in economic management. It must service the world's most onerous public debt burden (182 percent of its gross domestic product, compared with about 36 percent in the United States) while meeting the mushrooming pension and medical needs of the world's oldest population.

Japan's huge debt is a hangover from the 1990s, when the government borrowed heavily to stabilize the economy during a decade-long collapse in real estate and the stock market. That collapse still echoes in daily life. Housing prices have climbed back to 40 percent of their 1990 values; Tokyo's main stock index is down 70 percent from its peak in 1989.

Servicing the debt and supporting ever more retirees requires economic growth, but the Bank of Japan cannot afford to allow growth to get out of hand. Exuberance could drive up interest rates, now kept stunningly low by the central bank. Higher rates could disastrously raise the cost of servicing the debt and endanger the country's credit rating.

As compared to central banks in other major economies, the Bank of Japan has very limited capacity to lower interest rates and encourage business borrowing.

Meanwhile, the demographic crisis complicates all attempts to sustain growth.

Immigration remains a largely taboo subject, although some senior government officials privately say Japan will inevitably have to bring in millions of working-age immigrants.

With the world's highest proportion of elderly people and lowest proportion of children, population decline will reduce economic growth to zero by 2050 and remove 70 percent of the labor force, according to the Japan Center for Economic Research.

Japan's primary tool for paying for all these problems is the export of highly engineered goods -- Toyota cars, Canon cameras and Komatsu bulldozers.

Prospects for exports, however, have dimmed in recent months, and a prolonged recession in the United States and China could turn them black. In the second quarter of this year, the net contribution of exports to economic growth was zero.

"Exports are in a very tough situation," Bunmei Ibuki, the Japanese finance minister, said recently.

Had the U.S. government not embarked last week on a massive bailout of financial institutions, the chances that Japan could revive and sustain economic growth were slim or none, said Courtis, the former Goldman Sachs manager for Asia.

"With its economy already contracting," he said, "the bailout in Washington is the best news Japan has heard in many, many months."

In midday trading Monday, stocks in Japan were up nearly 2 percent.


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