On the rise, or on the nose? Like most other economies, Japan's has had its ups and its downs. But this is no ordinary economy, this is the country that back in the 1980s was number two in the world and tipped to overtake the US within a decade, Tony Bosworth looks at what went wrong and examines what could happen if Japan's sun start to rise once more

Business Asia, April, 2004 by Tony Bosworth

Back in 1981 a friend of mine, a fellow journalist, came back from Japan and penned a story for his national newspaper that began, "I didn't know whether to laugh or cry". At the time we knew what he was talking about. Japan was a rising star but it had not reached the maximum velocity that would see it, within a decade, come close to trouncing the US economy and moving into poll position. Japan back in the early 1980s was a country racing to make its mark and sometimes it missed the mark, thanks to lack-lustre products, a lack of innovation and imagination. But how things change. Fast-forward to the mid-1980s and Japan was truly a force to be reckoned with. Its electrical products were no longer copies of western designs, its cars no longer soggy steering and garish looking (well, some still were ...) and all of a sudden all of the cool gadgets, the innovations and the imagination was flooding out of Japan. For a while the economy boomed and boomed and no end seemed in sight. But then it all came crashing down.

Another friend of mine, this time a marketing manager with a major multi-national electronics company told me in the mid-1980s that the Japanese miracle could not keep growing. I laughed at this and pointed to the Japanese work-ethic, their pride in what they did, their near-messianic zeal in all matters of business. He laughed too and said, "Tony, a generation is growing up on fast food and fast culture. They aren't like their fathers."

And so it was. During the 1990s the alarm bells began to ring. Japanese companies never laid their workers off. If there was a down-turn in an industry and companies had to shed workers they would open new factories. So, a car maker might open a factory making ping-pong balls if they could see a need for them. But all that began to change and workers suddenly found themselves on the streets with no social security net. Suddenly Japan was looking like an economic basket-case and come 2001 Standard & Poor's rating agency dropped Japan's debt rating from a perfect triple A to an AA , the first time that had happened in 26 years.

Japan's economy moved into recession and it's been there ever since as unemployment grew, economic growth and industrial production slowed and consumer spending dipped. A record 5.3 per cent unemployment was the norm by mid-2001.

What brought about this role reversal in the economic world was a combination of things but in essence too much of Japanese industry was too closely tied to government, too much of it was still in government hands rather than the private sector and Japan's banks had a high level of debt. A succession of weak Prime Ministers and lack-lustre governments saw the country stagger from bad to worse. The world's once second biggest economy brought low, it was not a pretty sight.

Today, Japanese PM Junichiro Koizumi holds the reins of power and indeed has been re-elected by the Japanese people on the promise of sorting out the country's woes. But can he do it? He's already had one term in office and though he made changes, setting the country on the road to much greater privatisation, for example, his first term did not deliver the promised economic reversal. But now Koizumi is there again and he is still pushing the reform agenda and at last it seems to be having some positive results.

The Japanese economy is steadily recovering, as seen in the improvement of corporate revenues and increases in capital investment. The economic growth rate has been positive in real terms for 18 consecutive months, and even in nominal terms has been positive over the past six months. However, the unemployment situation is still bad.

Economic matters

Koizumi believes that regional revitalisation is the key to realising an energetic Japanese economy. "We will further accelerate reforms in the areas of finance, tax system, regulations and expenditure that will lead the vigour of the private sector and motivation of the localities. The Government of Japan will aim to overcome deflation and achieve economic revitalisation together with the Bank of Japan," said the PM in a recent speech.

Koizumi believes the greatest challenge is reform of the public sector.

"In this regard we have advanced administrative and fiscal reforms. With regard to the privatisation of postal services, which could be said to be the heart of reform, we are currently pressing forward with concrete deliberations in the Council on Economic and Fiscal Policy. It is expected that by autumn of 2004 the Council will have compiled a privatisation plan that will provide better services for the public, and this plan will be submitted as a bill on privatisation in 2005."

Most economists are convinced that wider privatisation is the key to Japan's recovery.

Under Koizumi, out of a total of 163 public corporations, 80 per cent have been closed, privatised or converted into incorporated administrative institutions "This means," says Koizumi, "that their operations are thoroughly reviewed, transparency is increased and strict evaluation is applied. Retirement bonuses for board members of special public corporations and incorporated administrative institutions have also been greatly reduced to a level equivalent to those of national government employees."