By Blaine Harden
Washington Post Foreign Service
Thursday, February 4, 2010; A12
TOKYO -- It's been a humbling few days for Japan.
Toyota, the nation's largest company, announced vehicle recalls on three continents and shut down five assembly plants in the United States, and its president told the world, "We're extremely sorry."
Standard & Poor's threatened to downgrade the Japanese government's credit rating because Prime Minister Yukio Hatoyama is moving too slowly to reduce the debt.
And China overtook Japan as the world's largest maker of cars, according to an announcement from the Japanese Automobile Manufacturers Association.
The triple whammy of manufacturing and fiscal problems is a harbinger of what Japan faces in the coming years as its listless economy meanders into an era of reckoning and national loss of face.
Within a year, Japan will probably lose to China its longtime status as the world's second-largest economy. It is also expected to descend into the uncharted waters of public indebtedness as government debt swells to double the size of the country's gross domestic product.'Quite doomed'
Although the alarming headlines grabbed the public's attention, Japan's most fundamental economic ills have not. Like distant melting glaciers, they have not alarmed voters, mobilized politicians or triggered a national emergency response.
"I do think the current situation is quite doomed, but Japan does not yet have a sense of crisis," said Hiroko Ogiwara, an economic commentator and author of popular books that advise housewives on money management.
The building blocks of Japan's future are collapsing, in the view of many economists. Japan has fewer children and more senior citizens as a percentage of its population than any country in recorded history, but the government does little to encourage childbirth or enable immigration.
Even as the working-age population shrinks, only a third of Japanese women stay on in the workforce after having a child, compared with about two-thirds of women in the United States. Government spending on education ranks near the bottom among wealthy countries.
Although the government has been talking for two decades about weaning itself from dependence on exports, Japan's economy remains addicted to exports for growth.
And deflation, the curse of the "Lost Decade" of the 1990s, is back with a paralyzing bite. Prices and wages are falling as aging consumers save their pension checks and wait for still-lower prices.
"It is a slow-motion implosion," said Takatoshi Ito, a professor of economics at the University of Tokyo. "The current direction is clearly unsustainable, and something has to be done. The more delayed the response, the more sacrifices will have to be made. It is not good for future generations."
Expert panels and detailed policy papers have been spelling out an antidote for decades:
-- Raise the consumption tax and control benefits for senior citizens, including pensions and access to health care.
-- Use the money to build day-care centers, improve public education and create a framework of subsidies that reward young people for bearing children and help mothers stay in the workforce.
-- Increase immigration so that by 2050, 10 million residents will be foreign-born.
The problem with these measures is that they are not very popular with voters, especially those older than 65, who make up about 22 percent of the population. These measures are likely to become less popular over time: By 2050, 40 percent of the population is projected to be older than 65.
"We haven't had a crisis big enough to force pensioners to see it is in their own best interest to force politicians to do the right thing," said Robert Feldman, head of economic research at Morgan Stanley in Tokyo.'Haven't bottomed out'
Feldman and many other analysts say Japan has the capacity to respond to a crisis and to mobilize its human and industrial resources in a highly focused way.
Out of the ashes of World War II, it organized a miracle of manufacturing. After the oil shock of the 1970s, no industrialized country squeezed more affluence out of less imported energy than Japan.
"We are quite strong in times of real peril," Ogiwara said. "But we haven't bottomed out yet."
Japan's public debt is the highest among industrial countries as a percentage of GDP, but it is probably not going to be the problem that sinks the economy. For unlike the United States, which has borrowed heavily from China, Japan borrows almost exclusively from its citizens.
Housewives and pensioners keep much of their money in bank savings accounts. They don't mind ultra-low interest rates and are unlikely to withdraw their money if Standard & Poor's blows a whistle on Japan's sovereign rating.
"Japan is not Iceland," said Ito, the economics professor, referring to the country that went bankrupt in fall 2008 when it could not meet foreign-debt obligations.
Ito said that even in the extremely unlikely event that Japan defaults on its debts, "it would not be an international crisis or a currency crisis."
But Ito and other economists also said the interest rates that the Japanese government pays to borrow from its citizens are creeping upward as the pool of Japanese workers and savers drains.
By 2060, Japan will have two retirees for every three workers, a ratio that will dry up savings and could overwhelm pension and health-care systems.