Asian Focus Set to Return to Japan
In the Asia-Pacific region, interest in China has eclipsed that in Japan. China’s economy has grown by 9% over the past year, versus Japanese growth of less than 2.5%. However, it is worth remembering that Japan’s GDP is almost three times that of China.
The decisive electoral victory for Prime Minister Junichiro Koizumi leaves him with a clear mandate to pursue market friendly reforms. The financial reforms that he has championed are expected to raise the growth rates for both productivity and the economy and in turn reduce Japan’s fiscal stress. This has helped to push the Tokyo stock exchange to a 4-year high.
The economy Koizumi inherited in 2001 had been languishing since the crash of the Japanese equity and property markets in 1990. Banks struggled with non-performing loans and continued to channel loans into large but insolvent companies, while strangling the abilities of new businesses to obtain credit. The 1990’s saw a big increase in public works spending, but this benefited politically connected construction industry more than Japan’s long-term growth.
Japan already benefits from a positive business climate, a rule of law, advanced infrastructure, a highly skilled workforce and affluent consumers. Financial reforms offer the best hope to further strengthen these positive attributes and Japan’s future growth. Progress has been made in the Banking system but the challenge is to break up the postal system which controls the equivalent of US$3.3 trillion of life assurance policies and lies at the heart of Japan’s financial restructuring. By offering subsidised rates to depositors and policyholders, the existing system puts private commercial banks and insurance companies at a disadvantage. Koizumi’s plan is to split Japan’s post into mail, banking/insurance and property management in the hope of stimulating competition and limiting the flow of public funds to wasteful public projects.
A politically and economically muscular Japan is a better ally on the world stage and could provide an example of the benefits of reform for emerging economies like China. Moving the world’s second largest economy into a faster mode of growth would also provide a much needed boost to global growth and be a tremendous tonic for the world’s financial markets.
By Edward Menashy, economist at Charles Stanley Equity Researc
