Asia Times: EDITORIAL: Reagan redux?



	March 26, 1999	atimes.com

Japan Economy

EDITORIAL: Reagan redux?

After showing some surprising and encouraging strength since January andespecially in the first half of March, the Tokyo stock market's Nikkei 225average lost some 800 points over the past two days. Was it all justanother false start as so often in the past several years?

We don't think so. A Morgan Stanley analyst's recent statement that theTokyo bear market that started on December 31, 1989, came to an end on March5 of this year may have been overdrawn. As in the case of the past two days,there will be temporary reversals in the months to come and no full-blownbull market can be expected until economic recovery truly takes hold.Still, the Obuchi government policies enacted since the middle of last yearin combination with the Tokyo Big Bang reforms, started in April 1998 and aimed at liberalizing financial markets, are basically the right stuff and will pull Japan out of recession.

A comparison with developments in the U.S. economy in the late 1970s andearly 1980s is instructive. The U.S. then was in the grip of a severe bankingcrisis affecting not just hundreds of smaller savings and loan (S&L)institutions, but also larger banks (Chase Manhattan, Citibank) that - withsevere lack of due diligence - had overlent to Latin America. Theequivalent of today's Asian crisis then was the Latin American debt crisisculminating in the Mexican debt moratorium of 1982. American corporationslooked bloated, debt-ridden and increasingly uncompetitive internationally.

The Reagan administration and the U.S. Congress responded to this economicquagmire with some drastic measures: substantial tax cuts, deficit spending(driven by the defense sector), and uncompromising financial restructuringultimately driving a majority of S&Ls out of business. Simultaneously, awave of mergers and acquisitions accompanied by dramatic downsizing usheredin a 10-year period of in-depth corporate restructuring. The financialindustry responded to the challenge by inventing and putting in place awhole set of new financial technologies that should give Americaninvestment firms a huge future competitive edge. Lastly, the computerindustry - on both hardware and software sides - took off and the personalcomputer transformed American life. Today's vibrant U.S. economy is theresult of those public and private policy initiatives of the 1980s.

The changes now taking place in Japan are not exactly on the same scale andcultural factors will for a good long time stand in the way of developingthe free-wheeling entrepreneurial culture that now powers the Americaneconomy. But the right steps have been and continue to be taken by thecurrent LDP/LP coalition government.

Banking system rehabilitation is at long last in full swing with theallocation of 7.5 trillion yen to ailing banks on condition of downsizingand restructuring. Big Bang liberalization is introducing fiercecompetition (including through the entry of foreign financial institutions)to the financial and securities industries. The just decreed tax cuts forthe next fiscal year total 9.4 trillion yen ($79 billion) and after muchhaggling in parliament are now of the right nature: permanent cuts inincome and corporate taxes (bringing the latter in line with internationaldeveloped sector standards) and strategic tax breaks on mortgages to revivethe property market. Deficit spending, of course, has always been a featureof Japanese attempts to get the economy moving again; but this time aroundthe amounts are larger then ever before and are being brought to bear inthe context of decisive reform measures.

That leaves corporate restructuring. Sony and other large companies arebeginning to show the way there. As in America in the 1980s, it will be apainful and long-drawn out process, create more unemployment beforecreating new jobs, and lead to growth revival only after a period ofadjustment and contraction in sunset sectors of the economy. But it appearsthat it is now a spreading, private-sector undertaking.

In this context, it is now the right time for investors to buy Japan.

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