September 5, 2009

By Thanong Khanthong

The Japanese media, in their attempt to show a way out for their country facing a political transition, are still hooked to a "growth strategy". The followings are a summary of the Japanese media's commentaries (JP Morgan, August 28, 2009), written before the Democratic Party of Japan's earth-shattering victory. 

An article in the August 2 Nihon Keizai Shimbun called on the Liberal Democratic Party and the Democratic Party of Japan to contest Sunday's general election on the basis of concrete growth strategies for the nation's economy. It chastised the DPJ in particular for not even including growth strategy as a plank in its campaign platform. As to just what such a strategy should entail, the Nikkei suggested policies aimed at setting the stage for higher
corporate profits and increased employment.

• Growth strategy was also the topic of a piece in the August 24 Yomiuri Shimbun citing the absence of any real prospects for a full-scale recovery in Japan's economy. It cited the DPJ's failure to offer specific growth targets and said that it should do so if it wants to take power.
• The August 14 Asahi Shimbun carried an article on the need for a new industrial revolution for an aging Japan. It called on the political parties to turn trial into
opportunity and remake Japan for a more mature era, arguing that Japanese politics faces an unprecedented need for the kind of broad vision and imagination required for a new industrial revolution.
• An article on growth strategy in the August 26 Mainichi Shimbun advised a "reset" of Japan's vertically segmented administrative system. It said that while Japan has a wealth of excellent technologies, these remain stuck at the basic technology stage owing in part to the country's system of government administration. It concluded that an overhaul of the system and its links to industry is a key issue for the nation's growth strategy.

Japan suffered a burst of the economic bubbles in the early 1990s and it has yet to recover from that hangover. Over the past 15 years, the averaged growth rate of Japan is about 1 per cent. The Japanese voters gave the Democratic Party of Japan a landslide victory because they were quite worried about their future -- their pensions, their jobs, their healthcare and their security.

Yukio Hatoyama, the new leader, promises reform for Japan. But how far?

If Japan would like to keep its people happy, the new government under Yukio Hatoyama must raise the consumption tax to 15 per cent and steer the economy to achieve a growth rate of 2 per cent. That's why the Japanese media have been calling for the new government to devise a "growth strategy", and they are appalled that neither party is offering any. Some of them even want Japan to mount on a Second Industrial Revolution.

But can Japan continue to achieve a 2 per cent growth rate going forward? To achieve this growth rate, Japan needs further investment for exports. Without any resources, it has to import oil, coal, copper, iron ore, aluminium as raw materials before turning them into industrial goods. From a country of high ideals and culture, Japan has quickly turned itself into a robot society due to the industrial revolution. Land prices are beyond the reach of the common people.

Growth and prosperity are the buzzwords of the foundation of modern economic thinking. A country must grow its economy so that its people achieve prosperity and stability.

Japan's post-war economic machine is the wonder of the world. It has plunged on an industrial revolution. Within a generation, it is able to move forward to become the second largest economy in the world after the US. But this machine is now running into trouble.

For growth and prosperity have brought about excess production, excession consumption and also excess paper wealth creation. Japan has relied mainly on the US for growth and its security. It has agreed to be the supplier of goods mainly to the US. And the US has agreed to be the consumer of the goods from Japan. When Japan sells its goods to the US, it gets paper currency, which is not backed up by any assets, in return. Since people all over the world come to "believe" that the US dollar is a world reserve currency, they hold on to the US dollar as a store value of their wealth. The paper currency it earns from selling goods to the US goes back largely into buying the US Treasuries and debts to fuel further US consumption. Japan has been helping to prop up the US dollar so that it keeps its yen cheap to boost exports. It is a perfect master-slave proposition.

Now Japan has about US$1 trillion in foreign reserves. Soon other Asian countries -- South Korea, Taiwan, Hong Kong, Singapore, Asean and China as the latest case -- followed Japan's export-led model.

The wealth of Japan goes into the construction of new buildings and investment in new plants and factories. There are cement buildings everywhere in Japan. The buildings also spread to the country-side to the extent that Japan no longer is interested in producing food to feed its people. It believes that it has enough money gained from selling industrial goods to import the food. Meanwhile, it treats its minority farmers with special privileges.

Japan is now caught in a dilemma of whether it will move forward with the industrial development or whether it will have to adopt a new economic model. This depends on its view of the global capitalism. If it believes that the world system is already overwhelmed by excess consumption, excess production and excess paper wealth creation, then it can't continue this course of industrial development further. In industrial production, Japan has to import the raw materials for production of finished products. It is also shifting its industries to the overseas. All of this industrial production is tied to the modern-day banking system.

Japan's per capita income is about U$33,800 compared to Thailand's US$4,111 (8 times larger). Japan's budget size is around US$1.6-US$1.7 trillion (35 times larger), compared to Thailand's Baht1.7 trillion. Japan's population doubles that of Thailand's 65 million.

Even though Japan is very rich compared to most other countries in the world, it is still very worried. Enough is never enough.   

The Democratic Party of Japan has already announced that it would shifted the country away from export-led growth. We shall see how it will implement this policy. Its leadership must have realised that the consumer age of modern-day capitalism has ended. The more Japan produces, the more it will have dead stock in its warehouses and factories. Even Paul Krugman, the Nobel prize winning economist, admits that the export-led nations would need consumers from another planet to purchase their goods because the planet earth people no longer have the money. 

An economic success is accompanied by overspending by the government. Most of the governments in the industrial world are facing the same disease of overspending to make the people happy with all the social security, pension and healthcare benefits. Japan's public debt now stands at 175% of GDP.

Japan has a choice of staying a course of industrial development and hangng on to the US or abandoning the US. If it stays with US by holding on to the US dollar reserves, in the end it might lose everything in the event of a US dollar collapse. Most of its wealth earned from industrial revolution now goes into dollar reserves, paper and buildings.

By the way, buildings are expensive to maintain. Japan would need energy and tenants to continue to use the buildings. In the end, they could become dead assets.

If Japan decides to save itself by converting the US$1 trillion reserves to pay off for the debt and holds on the course of self sufficiency instead of export-led growth, it might survive. The old capitalist course will not work because Japan will need at least 2% growth every year to sustain the public spendings and other costs. But over the past 15 years, average growth is 1% or less. Going forward it is even impossible to achieve 2% growth because that would require further huge investment in industrial development. The new investment would surely turn sour because the global consumption is disappearing fast.

Capitalism has arrived at its peak of overproduction, overconsumption and absurd paper wealth creation. The only way forward is downward adjustment to arrive at the real fundamental. But this is going to be a painful adjustment that few, including many among the Japanese, would dare to face.

If Japan were to dump the US for its own survival, that will accelerate the US collapse. But in the event, it might not survive either.

Unfortunately, China is following this very same pattern of industrial growth and consumption -- and destruction.