- Norio Ohga, Chairman of Japan's Sony
Corporation, warned today that Japan's economy was close to collapse and
that Japan's collapse could lead to a worldwide recession. According to
Ohga, the Japanese economy was facing its most difficult time ever. He
compared Japanese Prime Minister Hashimoto to Herbert Hoover: "What
President Hoover was saying then, there are so many similarities with what
Prime Minister Hashimoto has been saying recently. Hoover triggered worldwide
recession. I just hope remarks by Prime Minister Hashimoto won't trigger
worldwide recession". According to Ohga, the central problem facing
Japan is deflation, driven by a lack of consumer spending in Japan. Ohga
therefore called on the Japanese government to stimulate the economy, increasing
consumer spending and stabilizing prices.
- Ohga has merely stated the obvious.
Japan has been stagnant throughout most of the 1990s and its condition
is worsening. The Bank of Japan's "business condition diffusion index,"
which tracks business sentiment has fallen to the worst level since 1994.
This understates the problem. The extended malaise of the Japanese economy
is wreaking structural damage as time goes on. Both Daiwa and Tokai banks
announced cuts in lending to large companies while it was announced that
capital spending in general would decline in 1998. As with the United
States in the 1970s, the decline in the availability of capital triggered
by the banking crisis means an increasingly aging and less efficient industrial
plant. As this happens, Japan's exports become less competitive, increasing
pressure on the yen. As the yen declines, the willingness of investors
to invest in yen denominated paper declines, increasing the capital crisis.
- The obvious answer is to stimulate the
economy, as Ohga suggested. But Japan's financial condition is much worse
than the U.S. condition in the early 1980s. Stimulating consumption must
come at the expense of the savings rate. A high savings rate at low interest
is now and has always been the foundation of the Japanese banking system.
The availability of nearly free money to banks that are in dire trouble
is the only thing that permits them to continue functioning. Eliminate
the constant infusion of savings and the banking system would collapse
and with it the inefficient, linked companies who depend on cheap money
to maintain their balance sheet. Increasing domestic consumption is the
long-run solution, but as the Japanese bureaucrats understand very well,
it is not clear how to get there from here. Increased consumption would
stimulate the economy, but only after knocking the bottom out of the banking
system. Ohga, who heads one
- of Japan's more successful companies,
is not completely sensitive to the precarious condition of most other Japanese
- This means that Ohga's warning should
be taken seriously while his solution cannot be. Ohga's warning is an
important turning point in the Japan story, since it represents a dire
prediction from a leader of the Japanese business community, someone who
cannot be dismissed as merely a sensationalist or alarmist. If Ohga is
worried, everyone should be. The problem is that there does not appear
to us to be any way out of Japan's dilemma. This is not the first time
Japan has faced this dilemma. During the 1920s, a very similar banking
crisis took place. The result was a devastating recession and the emergence
of political extremism.
- Until this point, analysts have been
focused on the question of whether or not Japan can avoid economic disaster.
It has been our position that Japan's economic fate has been sealed ever
since the Japanese government decided to follow a strategy that refused
to deal with the emerging banking crisis--that is, since around 1992.
Now, Sony's leader has come close to the same conclusion, at least in the
sense of facing the magnitude of the crisis. From our point of view, the
central question is no longer whether the Japanese economy is facing calamity,
but rather what the consequence of that calamity is going to be. One aspect
of this is its effect on the rest of the world. We are not certain that
Japan's decline will have an enormous negative effect outside of Asia.
The second aspect is its effect on Japan itself. Since the end of World
War II Japan has been a liberal democracy, a system imposed by the United
States. If Japan goes into a depression, it will be a very different country
than the prosperous and cocky Japan of the 1980s. With that difference
will come wrenching political changes. We urge analysts to study the 1920s
in order to get a sense of the possible evolution of Japan, should Ohga