The Prospect And Challenges Of
Japanese Economy, Politics, Society After
The Financial Crisis In An International Perspective
Haruo Shimada; Professor, Economics Dept, Keio University
I. Introdution
This paper reviews Japan's experience of recent financial crisis and discusses its impacts comprehensively encompassing such aspects as economy, politics, and society, and assesses future prospects both in terms of domestic developments and international implications.
II. A review of Japan's experience of recent financial crisis
Japan's financial crisis broke out most visibly in November l997, when several major financial institutions collapsed, including the bankruptcy of Hokkaido Takushoku Bank, the single largest regional bank in Hokkaido, and the extinction of Yamaichi Security House, one of the four major security houses in Japan. The financial crisis symbolized by this panic triggered a serious subsequent downturn of the Japanese economy.
In fact, the Japanese economy had been trapped in a vicious circle of decline well before this event. This panic simply aggravated the pace of falling. All this deterioration was caused apparently by a series of mismanagement of economic policies.
The critical turning point of the Japanese economy toward decline may be identified as April l997, when the purchasing power of consumers was curtailed as much as 9 trillion yen: by an increase of consumption tax from 3% to 5% amounting to 5 trillion yen, a termination of special income tax reduction of 2 trillion yen and an increase of medical expenses born by patients by 2 trillion yen. The economy lost the momentum of growth quickly after the imposition of this burden. The economy had grown as much as 3.9 % in 1996, but shrank by 0.5% in l997. In fact, the stock prices started to decline as early as June l996 when the government decided to increase taxes and medical charges from the following fiscal year.
Without paying attention or being aware of the beginning of this economic downturn, the government led by the cabinet of Prime Minister Ryutaro Hashimoto, moved to prepare the Fiscal Structural Reform Law. The bill prescribes the amount and methods of reductions of government spending in many of the relevant expenditure items aiming at reducing the government deficit to GDP from 7 percent in l998 down to 3 percent in the target year of 2003. The prescribed amounts of reduction of spending are particularly large during the first three years, which are designated as the period of intensive budget cut. For example, the public construction works were planned to be cut by nearly 10 percent annually.
Pressed by these deflationary impacts, stock prices fell more sharply than before, which gave rise to an increase of the net bad loans held by the banks. In the process of accelerated decline of stock prices as well as prices of other assets, the financial panic of the collapse of several major financial institutions erupted in November 1997. The Fiscal Structural Reform Law was enacted in late November, and based on this law, the austerity budget for FY l998 was organized in December, which aggravated further the deterioration of the economy.
Faced with this serious decline of Japanese economy, criticisms against policies of the Hashimoto administration grew intensified both within and outside the country. The international community began to criticize loudly the Hashimoto policies worrying that the recovery of Asian economies may be hampered and more broadly the world economy may be disturbed seriously by the poor management of Japanese economic policies. Domestically, the anti-main stream group within LDP grew increasingly vocal in criticizing the failure of Hashimoto economic policies. For fear of giving in to the criticism of the anti-mainstream group, the Hashimoto cabinet and LDP executive officers hesitated to change their policy stance and thereby aggravated the deterioration of the economy.
Prime Minister Hashimoto, however, finally started to change the policy stance just around the turn of the year. In mid-December, he announced without prior consent of LDP executives an extra-ordinary income tax cut of 2 trillion yen. In January, the cabinet decided to organize a major spending package, a clear signal of the change of policy stance from an austerity to an expansionary fiscal policy. The package of a historically unprecedented size of 16 trillion yen was put to effect in late April. Perhaps being confident with a plan of such a sizeable spending, the government announced that the expected real economic growth rate for FY1998 is 1.9%.
Concurrently, a major scheme of financial stabilization was formulated and put to effect in February l998. This is the scheme of max 30 trillion yen; 17 trillion yen to enlarge the fund for depositors' insurance, and 13 trillion yen for the fund to be used as capital injection for banks. Toward the end of March, the end of fiscal and accounting year, some 2 trillion yen was spent to inject capital to all of the 19 major money center banks with a hope to prevent banks from bankruptcy.
From April 1998, the early alarm rule was made effective, under which the banks need to satisfy the condition of capital adequacy ratio of 8% to operate globally (4 % for domestic banks). And the newly established Monetary Supervising Agency can order stoppage of banking business if the ratio is not satisfied. This new system, ironically, aggravated the credit crunch. This was because a decline of stock prices necessarily reduces the self-capital of banks. Given the rule of capital adequacy ratio, the banks are obliged to reduce the amount of loans in order to maintain the required ratio. With the continuous decline of stock prices and pessimistic prospect of the Japanese economy, the credit crunch grew increasingly prevalent and hurt the economy more seriously.
As the credit crunch grew more pervasively, management crisis of the Long-Term Credit Bank of Japan became suddenly apparent. In the absence of solid rules to handle such a case of bank, which is facing a failure, the government tried every possible means to prevent the bank from going bankrupt. This is because the LTCB was considered too large to kill for its probable destructive impacts to financial communities both in Japan and abroad. Under the pressure of mounting crisis, young members of a LDP task force, presumably with a guidance of the US government, prepared a draft for the bridge bank system, by which the failed bank is temporarily managed under the state control while the borrowers from the bank will be financed from the government fund for the time-being.
Under the very pessimistic atmosphere about economic prospect, the House of Councilors election was held July 12. Quite opposite from the confidence held by LDP leaders up to the day of election, the result was surprisingly a disastrous loss for the LDP. Unlike their expectation that the LDP will win the majority by a large margin, they only secured seats far less than a half. Taking the responsibility of the defeat, Prime Minister Hashimoto resigned next day.
The LDP quickly organized the intra-party election to decide the next leader. Out of the three candidates, Mr. Obuchi, who had the largest organized votes, won the election. Since the LDP has the largest seats in the House of Commons, he was nominated as the Prime Minister. However, the Obuchi cabinet was left in a very vulnerable position in the Diet because the LDP now has only a minority position in the House of Councilors. If opposition parties all get together in the House of Councilors to oppose bills presented by the Obuchi government, it is possible that the Obuchi administration may not be able to enact anyone of their bills except the budget bill.
Taking advantage of the superior bargaining position, the opposition parties attacked harshly the legislative actions of the LDP particularly on the much-focussed financial reform bills. Democratic Party led by Mr. Naoto Kan, which increased their seats markedly in the July election, obliged the LDP to accept their draft almost totally in place of the draft prepared by the Obuchi cabinet. The Democrats insisted comprehensive disclosure, punishment of management failure, and separation of monetary and fiscal functions of the Ministry of Finance, while the LDP was less willing to join such reforms but was more eager to inject capital to troubled banks. After spending a few months of complicated, and at times, confusing debates, two major important bills of financial reform were enacted in mid-October.
One is the financial reconstruction law, which prescribes conditions to take care of failed banks. The failed bank is put under the government control for the transition period, while the customers (borrowers) are protected temporarily by the special fund. To finance such actions, a special account of 18 trillion yen is established.
The other is the financial recovery law, which aims at strengthening the troubled but hopeful banks by providing capital injections. For this purpose, a special account of 25 trillion yen was created.
Adding these accounts to the fund for Depositors' Insurance System that was enriched in February to 17 trillion yen, the total of 60 trillion yen was set aside for the purpose of financial stabilization. This is a huge amount and certainly appeared large enough as a safety net to prevent financial panics from taking place.
In the process of this Diet session, a cleavage between the Democrats and the Liberal Party, led by Mr. Ichiro Ozawa, became increasingly visible. Mr. Ozawa apparently wanted to make full use of advantageous position of the opposition parties in the House of Councilors to topple the Obuchi government even at the expense of paralyzing the legislative process of financial reform, while Mr. Kan meant to be more responsible to legislate financial reforms, intending to give the public an impression of "reliable" party which can legitimately assume the government in case the public so want.
The government announced a major revision of their expected economic growth rate for FY 1998 from 1.9% down to -1.8%, by an astonishing margin of 3.7% points. This suggests that the economy was in a serious process of contraction. It was obvious that the contraction was caused by the credit crunch of the financial sector, which was transmitted to contraction of real economy through declines of investment, consumption, and finally earnings.
The Obuchi government announced in mid-November a major economic package of 23.9trillion, which is certainly the historically unprecedented size. Of this amount, some 7 trillion was for tax cut, which later was increased to 9.3trillion. And 8 trillion was for public investment projects. The question was how quickly these budgets were to be spent effectively so that positive impacts will be given to the economy to increase its effective demand. The implementation of the tax cut, which originally was expected from January 1999, was delayed to April. And the actual spending of the budget for public investment projects will be dragged for a few to several months because of the difficult fiscal condition of local governments, which actually execute such projects. Incidentally, the actual issuance of special government bonds for FY 1998 will reach 34 trillion yen.
The extra-ordinary short diet session was held for about a month from the end of November, in which the supplementary budget entailing this special economic package and other auxiliary bills were debated. There again the LDP had to work very hard to secure support of different parties on different bills, which was certainly a "nerve breaking " process for LDP leaders. In this process, a new strategic idea of coalition of the LDP with the Liberal Party emerged suddenly. Surprising was the fact that Mr. Hiromu Nonaka, the chief cabinet minister, who was most antagonistic against Mr. Ozawa, played the role of architect for this coalition. This implies how difficult, vulnerable and sensitive the process of securing cooperation from different parties given the minority position of the LDP in the House of Councilors.
The prime intent of the LDP for promoting this alliance was to strengthening their position in the Diet to enact the new guidelines for Japan-US security treaty in the forthcoming ordinary session of 1999, and the intent of the Liberal party was to play up their presence as a small party making a stronger appeal of their policies including the support for the new guidelines.
Toward the end of the year, the government budget plan for FY1999 was determined, which is as much expansionary as possible under the severe fiscal conditions. The budget plan already assumed the issuance of the special bonds as much as 31trillion yen. In the ordinary Diet session, which started in mid-January 1999, Prime Minister Obuchi emphasized that the economy will recover a positive growth rate of 0.5% for FY1999. With the cooperation of the Liberal Party, the budget passed very quickly in the House of Representatives. Since the House of Counselors can not reverse the decision of the House of Representatives on the budget bill, the bill will be enacted soon.
With all these developments, the prime focus of interest of Japanese public as well as Japan watchers of the world is whether and when and how Japanese economy will recover from the mud that it has been trapped.
III. Economic, Political and Social Implications
1. Economic implications
(l) Failure of macro-economic policies.
It is a widely held view that the financial crisis in Japan was triggered by mistakes of macro-economic policies. The Hashimoto government increased taxes and medical payments of the public in spring of 1997 as much as 9 trillion yen, which in effect suppressed the purchasing power of consumers.
Although the economy appeared to have overcome the long recession which followed the collapse of the bubble by achieving a rather impressive growth rate of 3.9% in FY l996, a large part of this growth was accounted for by a sizeable increase of public investments promoted by the government economic package and abnormal increase of consumption of expensive commodities such as houses and cars prior to the expected increase of consumption tax in April 1998.
In other words, the Japanese economy was not really recovered from the long-lasting recession, and indeed was suffering seriously from a huge loss of asset values such as real estate and corporate stocks as much as well beyond 1000 trillion yen. The deflationary impact imposed by tax increases and austerity government budget, prepared in accordance with the Fiscal Structure Reform Law, upon the still weak and seriously injured economy triggered a vicious circle of deflationary spiral.
Another serious mistake was the delay in correcting the government policy stance. While the destructive results of policy mistakes were growing increasingly evident, the Hashimoto government did not react sensitively and wasted in vain a very precious time budget of several months, and consequently aggravated the crisis. It was partly because the Hashimoto government was committing itself to the Fiscal Structure Reform Law and was unable to deny their policy commitment, but perhaps more importantly because the Hashimoto cabinet and top executive members of the LDP were fearful of giving in to vocal criticisms of influential non-mainstream members within the party.
(2) Postponed surgery and reforms of financial sector.
To make Japanese economy recover from the destructive damages caused by the collapse of the bubble, it was necessary that major surgeries and reforms of the financial sector be executed as soon as possible. Such actions should include: complete disclosure of financial positions of banks and other intermediaries, setting clear-cut rules for reform and restructuring of the financial sector, conducting necessary surgeries and reforms, and requesting the public to bear necessary financial burdens for such reforms.
In fact, however, these actions were hardly taken neither by the government nor banks and other financial institutions. The delay of necessary reforms consequently aggravated problems. Some of the necessary reforms, which were much over due, were taken only after the panic in November l997, and eventually inflated enormously the economic and social costs born by the public.
(3) The lack of reliable market infra-structure
The fact that Japan has not been equipped with a reliable market infra-structure aggravated confusions associated with the introduction of "Big Bang"of Japan's financial system, and also with the process of conducting necessary reforms of the financial system to resolve the problems left by the financial crisis.
The reliable market infrastructure consists of at least the following three elements: namely, transparency, fairness, and safety. These elements were either non-existent or quite deficient in Japan not only in the financial market but also in many of other commodity markets as well as in labor market. This is perhaps because the Japanese economic system has long been dominated and controlled by the government and the reliable market infrastructure to endorse free competition was neither necessary nor perhaps irrelevant.
In case of the financial market, the lack of transparency or the absence of workable rules and systems for disclosure made it extremely difficult to ascertain the real financial conditions of banks and other financial institutions. The absence of good and rigorous systems of inspection and sanctions made it difficult neither to identify inappropriate actions nor punish faults, and thus failed to prevent moral hazards and gave rise to a loss of trust and confidence by the public on the financial as well as administrative systems. The absence of reliable safety net such as the depositors' insurance system, protection funds for securities investors and insurance contractors made the financial system unduly vulnerable against shocks.
(4) The problem of over-capacity
Having prepared a large safety net and started processes for necessary reforms and restructuring for the financial sector, the most pressing issue for the Japanese economy now is the over-capacity of industries.
The financial industry used to be the most notable case of over-capacity industry. Its excess capacity, however, is currently being curtailed in the process of restructuring. The shrinkage of financial industry will inevitably have serious consequences on other industries to make them shrink as well.
The Japanese economy is currently estimated to have a huge deflationary gap, which may amount to almost 10% of the macro supply capacity. This gap is alleged to have been created by a continuous reduction of effective demand of the macro-economy during the prolonged recession ever since the breakdown of the bubble. However, it is also true that much of the gap is associated with the obsolete supply capacity of industries.
Without suppressing or deleting this excess capacity, it is difficult to expect vigorous increases of investment in the private sector. The important challenge for Japanese economy is how to encourage future oriented productive investments while scrapping obsolete capital stocks. This restructuring of capital stocks has a mirror image of restructuring the employment structure. This is perhaps the most serious challenge for the Japanese economy as a precondition for the economy to restore a healthy pattern of growth for the 21st century.
(5) Accumulating fiscal deficits
Hoping to stimulate the Japanese economy, the government launched major spending programs repeatedly during the past year, which were all financed by special government bonds. During FY1998 alone, the government issued special bonds of 34 trillion yen, and for FY1999 the government already committed to issue bonds of 31 trillion yen to finance the initial budget. Major tax cuts that were promised to start in FY1999 will also be financed by public bonds.
Now the outstanding accumulated fiscal deficits of both the national and local governments amount to 570 trillion yen or 115 percent of the GDP. This will grow much larger soon, if the current pattern of lavish spending by the government continues to stimulate the economy.
The market recently put on an alarm light to indicate the danger of this uncontrolled increase of government fiscal debt by increasing the long-term interest rate. This implies that the pace and magnitude of issuance of government bonds are getting into a dangerous zone.
Many undesirable consequences are conceivable. Higher interest ratesdiscourage investments, increase the exchange rate of the yen, and will reduce exports and delay recovery of the economy. An increase of interest rate will also augument bad loans and destabilize the financial system.
Those economists who are in favor of Keynesian type demand management argue that once the economy restores a normal growth path compatible withits potential growth capability the accumulated fiscal debt will be absorbed. They like to quote the American experience since the late 1980s as a reference. In the case of American economic recovery, it should not be underestimated that the economy has gone through a comprehensive structural and institutional reform to foster viability of private sector economy since the early1980s. Without major and fundamental structural reforms, it seems questionable whether Japan will be able to resolve problems of a huge accumulated fiscal deficit by only increasing government spending to stimulate the economy.
(6) Structural reforms
What Japan really needs is a comprehensive and fundamental structural reform to change the total system from the government controlled economy of the catching-up era to the market led economy of the matured stage.
This basic reform is necessary in almost every branch of Japanese economy. For example, in the financial sector, Japan needs to develop the riskcapital market and strengthen direct financing from the capital market rather than indirect financing through banks. Genuinely market driven economy needs to be developed much more in such areas as communication, transportation, aviation, agriculture, medicine, child-rearing, eduction,caring of the aged, construction, and many other services.
Successful shift from the government controlled to the market driven economy may not be attained only by "deregulation" alone. We need to developat the same time a reliable market infra-structure, as mentioned earlier, which guarantees a good operation of the market system.
2. Political Implications
(1) Reform attempts by prime minister Hashimoto
When prime minister Ryutaro Hashimoto took the office in January l996, he declared a highly ambitious plan of 6 major reforms; namely, fiscal reform, administrative reform, monetary reform, economic structural reform, social security reform and educational reform.
He actually launched these reforms one after another and kept attractting public attention. The most visible among them was the reform of the administrative structure of the central government. He meant to reduce the number of ministries from 22 down to 12 by bundling some of them together. This appearance was perhaps strategically necessary given his "maverick" position within the LDP. In other words, his political power must rest in the public popularity rather than intra-party organizational support. His leadership has proved successful by the overwhelming victory of the House of Representatives election in October l997.
Even in the face of visible deterioration of the economy and ever increasing criticisms around them, the Hashimoto government did not change the ir policy stance. This was largely because the LDP executives, most notably Mr.Koichi Kato, the secretary general, resisted against such a change because they must admit their policy mistakes. They feared to lose power against anti-mainstream leaders such as Mr.Seiroku Kajiyama, who used to help Mr.Hashimoto as the chief cabinet minister but resigned in fall l997. This delay of policy change, caused by highly narrow intra-party politics, fatally harmed the economy as described earlier.
(3) The Obuchi administration and sensitive political alliance
Mr.Keizo Obuchi won the intra-LDP election against his contenders, Mr.Seiroku Kajiyama and Mr.Jun-ichiro Koizumi, and was nominated as prime minister in August l998. The most serious constraint imposed on the Obuchi cabinet from its beginning was that the LDP has only a minority position in the house of Councillers.
Mr.Obuchi, supported by Mr.Nonaka, the chief cabinet minister and an extremely skillful political manipulator, went through a nerve breaking process of bargaining and compromises throughout the first Diet session in order to pass the bills which his cabinet prepared. Learning from this painful experiences, they became inclined to seek more solid political alliance almost at any cost.
The first of such strategic choices was to form an alliance with the Liberal Party led by Mr.Ichro Ozawa, even despite the fact that Mr.Nonaka has been attacking Mr.Ozawa with unconcealed hatred. The LDP in effect successfully swallowd the Liberal Party allowing only one seat of minister.
This alliance is still in short of majority in the House of Councillers. To secure a power of dominance, the LDP therefore needs to secure a stable support of still another party. The second choice is to bring the Komei Party to their camp. To buy the browny's point of the Komei Party, the LDP government accepted a highly unpopular idea of distributing consumer coupons proposed by the Komey Party.
The next step is to nominate a candidate who is favored by the Komey Party and their religious supportive organization, Soka Gakkai, for the election of Tokyo Governer, which will be held in mid-April. The LDP, for this strategic reason, chose Mr. Yasushi Akashi, the ex-United Nations Deputy Secretary General by turning down Mr.Koji Kakizawa, a Tokyo born full-fledged senior member of the LDP who strongly wishes to run for the candidacy with his long career of studying Tokyo Metropolitan administration. The official reason for nominating Mr.Akashi is his international fame, but the real reason is obviously Mr.Akashi's close relationship with Soka-Gakkai.
One of the most important strategic intents and the underlying concern of the LDP to pusue all this delicate maneuver is to prepare a workable power balance in the House of Councillers which is necessary to pass the bill of the new guidelines of Japan-US cooperation prescribed by the Japan-US security treaty within this 1999 ordinary Diet session.
(3) Social Implications
Out of many aspects of social implicaitions, let me focus on implications on work places and working life, in short, issues of employment. In the profound recession in the wake of the financial crisis, unemployment has been increasingly steadily. The official unemployment rate has risen from the level around 3 % in the early l990s to 4.4% today.
This rate is slightly higher than the rate in the U.S. as of now. Among the advanced economies, this rate still seems modest particularly compared with European countries. However, for some structural and institutional reasons, Japanese unemployment rate tends to be much lower,say, around half compared with the rate in the U.S. for the same level of GDP gap. The fact that the Japanese rate becomes comparable with the American rate implies that the Japanese economy is seriously depressed.
The deterioration of business conditions as reflected in the labor market is beginning to bring about profound and pervasive impacts to employment practices and career patterns of people. The well known model of life-time employment is being shaken. The symbolic change is the dilution of such a practice in the banking sector, the most protected "sacred" segment of the economy where the industry has long been enjoying monopoly rents under protection. In fact, most industries of tradable goods maintaned a high degree of employment security largely because of their continuous increase of productivity and competitiveness. The collapse and shrinkage of the banking sector is making Japanese labor market more normal and economically rational.
The long lasting recession is obliging not only banks but also many of the companies and industries which were providing relatively stable employment opportunites to scale down and reshuffle their employment. Workers are obliged to realize increasingly that the "life-time employment" is a past practice of good old days. Employers are modifying wages,fringe benefits, retirement allowances in addition to employment practices to meet the challenge of unstable economic conditions. The government is moving slowly to change their labor market policies to adapt to new conditions by means of relaxing regulations on private employment services, working time and work patterns etc. The financial crisis seems to have triggered an important chain of structural changes in labor market and working life of people.
IV Global Implications and Future Prospects
(1) Japan's role and contribution to Asian economies
Japan's role in Asian economies is quite large and important. This is because the large presence and weight of Japanese economy in Asian economies. First, Japan's GDP occupies around 2/3 of entire Asian economies, and second, Japanese economy is deeply involved in Asian economies in terms of trade, investment and financial transactions.
The single most important role that Japan can play to help Asian economies to recover from the damage of financial and economic crisis is to grow and to purchase commodities produced in the hard hit Asian economies. The vigorous growh of Japanese economy can help recovery of Asian partners by promoting their exports to Japanese market at better prices. Unfortunately, however, the Japanese economy has been shrinking in 1997 and 1998. While Prime minister Obuchi commits himself to a positive growth in l999, most of research institutions, Japanese and non-Japanese alike, predict a negative growth for 1999 as well. This means that Japanese role in salvaging Asian partners from the serious recession in the wake of the financial crisis is only limited.
Notwithstanding the poor growth prospect of Japanese economy, Japanese government has been working hard since the erruption of financial crisis in Asia, summer 1997, to extend direct financial and other assistance to troubled Asian partners.
Japan provided since July 1997 to the end of l998 economic assistance totalling US$44billion in various forms such as the assistance through IMF , assistance to promote investment, trade finance, economic reform, manpower training etc.
In October l998, Minister of Finance Kiichi Miyazawa announced the New Miyazawa Initiative, by which the total of $30 billion will be provided, half in the form of Yen loans to promote economic recovery and another half in the form of enriching financial reserve to meet the financial demand arising in the process of economic reform.
To be more specific, assistance through international organizatons includes: $19 billion contributions to an international assistance package harmonized with the IMF. $23 billion aid through World Bank and Asian Development Bank.
Japan's bilateral assistance includes, for example, $30 assistance for private industries and trade financing, $7 billion assistance for economic structural reforms, $1.2 billion assistance for the socially vulnerable people and human resource development, for countries as Thailand, Indonesia, Phillipines, Malaysia, Korea etc.
(2) Increased inter-dependence and inter-penetration in the global economy
Looking ahead the long-terms trends which characterize the inter-national relations in the global economy, one may identify an increasingly dominant trend of closer inter-dependence and deeper inter-penetration of economies. This trend is reinforced by the developement of networking among resourceful corporations.
This trend grew markedly during the last decade being promoted partly by the phenomenal development of information technology and partly by the end of the cold war era. While the role of information technology is self-explanatory, the role of the end of the cold war needs a bit more explanation.
The end of the cold war realized the amalzamation of two major economic blocs with huge price and cost differentials. Corporations in high wage countries extended their investments vigorously to low wage areas in order to survive the global competition. In an attempt to pursue the best combination of resources, they developed a multi-national capability of networking utilizing information technology.
The Asian financial crisis occurred in this global trend of increasingly broader and deeper networking of economic resources. Dominated by an optimistic view about the future, Asian countries borrowed huge funds and invested in inflating assets, and investors in advanced and matured countries invested greedily seeking higher rates of returns.
The development of networking is irreversible. We need an appropriate set of rules and market infra-structures by which we can take advantage of the merit of networking while protecting ourselves from possible dangers and damages stemming from the mal-functioning of such technology and abilities.
International discussions are underway on international financial system on such topics as target zones or harmonization of exchange rates, closer financial cooperation of Asian countries, an idea of Asian Monetary Fund etc, and on trade and investment on such topics as further liberalization, more transparent and reliable investment codes, and regulation reforms on such new areas as communication and services. These internatonal cooperations can be effective only when international rules are vouched by transparency and self-dicipline of each of the member countries.
While the end of the cold war finishied the head-to-head confrontation of two major powers of the world, it did not really bring about peace to the world community. Asia is one of such areas where implicit confrontations and dangers still persist.
During the cold-war era, Japan allied with the U.S. under the bi-lateral security tready, which supports the US global strategy of containment.
After the end of the cold war, however, the importance of this security arrangement is given a new meaning in a new conflictive circumstances of this region.
In April 1996, Prime Minister Hashimoto and President Clinton agreed to reaffirm the importance of Japan-US security treaty in this new era. In this context, they also agreed to respecify the guidelines of Japan-US cooperation including any happenings endangering Japan in surrounding areas as prescribed by article 6 of the treaty.
Accordingly, the Japanese government, working with the US government, specified the new guidelines. The bill was prepared but had not time enough to be submitted to the ordinary Diet session of l998. The LDP-Liberal Party coalition government intends to enact this new guidelines in the ordinary session of 1999.
Currently, the focal point among various potential dangers in this region is the development in North Korea. In August l998, North Korea launched a long-distance missile across Japanese archipelago. This gave a considerable shock to Japanese political circle and gave rise to reactions. The government quickly moved to set aside a modest budget to develop a satellite which can be used for surveillance among other purposes.
Japan's basic security strategy under the current geo-politico-military circumstances is to protect the country with the deterrent force provided by the military alliance with the United States. Having a firm security arrangement with the U.S., Japan wishes to foster trustful relations with the neigbors by sharing information by mutual disclosure and increased personnel and other exchanges. Also, it is useful to probe possibilities of forming some form of collective security arrangement in the region by developing international dialogues.
Given this basic strategy, the first task of importance is to make the Japan-US security alliance reliable and workable. While both countries accumulate good amount of physical force in and around Japanese archipelago and Japan provides critical resources to the US military such as money and land, they do not quite have appropriate institutional and legal software which makes the alliance effectively workable.
What Japan needs are immergency laws, clear-cut guidelines for cooperation, affirmation of collective defence. And perhaps the most important of all is the understanding and support of Okinawans of the importance of the security alliance and their acceptance of American bases in Okinawa at least for the time-being unless international and technological conditions drastically change. To secure such understanding and support, what the national government and main-land Japanese must do is not so much as to provide subsidies and compensations but to pay more attention to and share problems of Okinawa as fellow citizens.
Having made the alliance reliable and workable, the two countries can cooperate as full-fledged partners, and on this basis, they can work together to foster trust with other countries of the region and hopefully to develop collective security arrangement for the future.
(4) Aging of population and probable change of organizing principles of Japanese society.
The demographic change is probably the single most important factor which will determine the future prospect of Japanese society. One of the changes is aging of population. Currently, the proportion of aged population older then 65 is 16 % of total population. This ratio is expected to rise up 28% in 25 years. Another is reduction of young population due to decline of birth rates and the shringkage of total population in the long-run. The current population of 126 millions will reach the peak of 128 millions in 2007, and then will continue to shrink down to 68 millions in 2100 by a medium prediction or 55 millions by a low prediction. The current pattern of change of birth rates appears to be closer to the low prediction.
This dramatic change of demographic structure will in the long-run alter the basic conditions which supported the employment and pay systems and income maintenance schemes for older population. The so-called 'life-time" employment system and seniority wages will have to give way to more fluid and flexible employment and ability linked wages. Public pension program will not be able to maintain the current level of payment relative to the past earnings.
Indeed, the government is now planning to change the current wage linked payment to price linked payment. This means that in the future the pensionees will not be able to get the share of economic growth. Under such circumstances,relatively able people will try to mobilize their ability and resources to secure other sources of incomes, and consequently, income differentials will widen between more able and less able people. This implies an important change of the alleged conventional organizing principle of the Japanese society for the last century.
About the author: Dr. Shimada is Professor of Economics at Keio University. He was initially specialized in Labor economics, but has extended his interest and expertise broadly in such areas as economic policies, business strategies and international relations. He earned a B.A. and an M.A. degree in Economics from Keio University. He spent a year in 1969-1970 at Industrial and Labor Relations School of Cornell University as a Fulbright Exchange scholar, and four years at Industrial Relations Research Institute of University of Wisconsin where- he earned Ph.D. degree. After returning to Japan, he was assigned as associate professor and then professor of the Economics Department of Keio University. While holding the job at Keio University, he worked also as visiting principal research officer at the Economic Planning Agency from 1978 to 1982. In 1986, he was visiting professor at Sloan School of Management at the Massachusetts Institute of Technology, and exchange professor of ESSEC (Ecole Superiere des Sciences Economiques et Commercials). He is currently serving as a member of Government Tax Commission, Fiscal System Council and Industrial Structure Council, and chairman of working committee of Japanese Investment Council. He has published numerous books to include Only One: Reform of Japan's Education (in Japanese) Resonance Publishing Co., Ltd., 1998; Corporate Tax Reform (in Japanese) Toyokeizai Pub. Co., 1998; Japan's Re-emergence Plan (in Japanese) Toyokeizai Pub. Co., 1997; Labour Market Reform (in Japanese) Toyokeizai Pub. Co., 1997; Japanese Industries in the 21st Century-Challenges and Strategies for the 21st Century (in Japanese) PHP Pub.Co., 1996.