Japan’s woes: The shrinking pie

Japanese trade union members demand drastic action to solve the country's economic woes

By Rebecca MacKinnon
CNN Tokyo Bureau Chief

CNN -- At the G-7 meeting in Ottawa this weekend, Japan's Finance Minister Masajiro Shiokawa sought to convince the six other industrialized nations that his country's economic woes would not undermine global growth.

Shiokawa promised major steps to combat deflation in the world's second largest economy. Structural reforms will be accelerated to pull Japan out from its fourth recession in a decade, he said. Non-performing loans dragging down the financial system will also be tackled.

But doubts are growing at home about whether the once-popular Prime Minister Koizumi can implement these promises.

The Japanese leader's ratings have plunged since he fired his popular but controversial Foreign Minister, Makiko Tanaka.

Koizumi's parliamentary support base -- even within his own party -- has always been weak.

Elected on a groundswell of public support, Koizumi's approval ratings have skidded below 50 percent, putting his ability to carry out drastic reform in greater doubt than ever before.

'Crisis needed'

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The growing consensus among financial analysts and economists here in Tokyo is that Japan may need a crisis to push it off the downward spiral of recession and onto the uphill slope of recovery.

"In the past it has taken severe crises to implement real change in Japan," Chris Redl of UBS Warburg, told CNN.

"And when was the last time you saw sweeping change in Japan? General Macarthur coming over?"

Redl is pessimistic that political consensus can be reached --and sweeping, concerted action actually taken -- without a shock to the system of the same magnitude as Japan's defeat by the United States in World War II.

Sounds pretty bad. But unlike 50 years ago, others point out that today Japan's main obstacle to recovery may have much more to do with its collective state-of-mind.

"To do something big you can't be without confidence. People are losing confidence," says Kuniko Inoguchi of Sophia University in Tokyo.

Politicians too are becoming downbeat, thanks in large part to a lack of consensus about where Japan should be going. A divergence of interests is not helping.

To be sure, making Japan's economy competitive again means doing what the bankers and investors want: cutting inefficient economic processes, eliminating useless jobs, denying loans to companies who can never re-pay them but who need the money to make their payrolls.

All of these things will make a vast number of Japanese people very unhappy for a very long time until they readjust -- or perhaps until their children do.

From a short-term point of view -- and that's the most important when it comes to parliamentary election cycles -- more people will be happier if the government plods on with more of the usual: public works spending whether or not the projects are needed and allowing banks to carry bad debts on their books so that ailing companies can stay afloat.

Sure, the happiness will be spread more thinly. But for ruling-coalition politicians, the important thing is quantity, not quality.

China parallels

Some commentators have pointed to China and to the words of China's market reformers, for inspiration.

In the late 1970s and early 1980s -- even before knowing whether reforms would survive communist party ideological battles -- Beijing voices could be heard to say: "Sure, we all have relatively equal slices of the pie, but that pie is getting smaller."

It took the autocratic strongman, Deng Xiaoping, to impose drastic and often very painful market reforms that eventually led to a growing economic pie.

Nobody is advocating less democracy for Japan. It probably needs more. Nor should we forget that Japan's pie is still a lot bigger than China's even today -- and is shared by a lot fewer people. Which probably helps explain the reluctance of many politicians here to act, and the electorate's passivity.

But one fact remains: Japan's pie is shrinking. And it's very unclear whether Koizumi or any other Japanese politician will be able to enlarge that pie without a big change in the way Japanese politics are conducted.