Man Without Qualities

Monday, November 10, 2003

Japan. Again, Japan.

What is it that causes reporters in - or reporting on - Japan to ignore or fail to understand the significance of what anywhere else in the world would be considered basic, bedrock economic and business principles - over and over and over and over and over and over, again?

The Wall Street Journal is again suggesting that Japan's recovery may "stick:"

The country's $4 trillion economy grew at an annualized 3.9% in the April-June quarter. Industrial production is surging, as exports boom and manufacturers invest in new equipment. Gross domestic product has expanded for six straight quarters and is expected to continue upward through 2004. The stock market has risen 40% in the past six months.

False dawns have briefly lit Japan twice before in the decade since the world's second-largest economy entered a prolonged downturn. Public spending and exports fueled short expansions and stock-market rallies in 1996, when the economy grew 3.3%, and in 2000, when it expanded 3.2%. Both times, a combination of ineffectual government and feeble corporate-restructuring efforts snuffed out growth, which has averaged just 1.1% annually in the past 11 years.

This time, many economists say the chances of a sustained recovery are the best they have seen. The severe problems Japan has faced -- a banking debacle, price deflation, stodgy corporate leadership and incompetent government policy-making -- all show signs of easing.

The change follows a widening realization that Japan must adapt its economic system or face the prospect of a long national decline.

Japan's problems are firmly rooted in the weakness of its financial markets and corporate management incentives. The Japanese bond market hardly exists, at least relative to the needs of "the country's $4 trillion economy" [We are also helpfully told: A healthier Japan would have huge implications for the rest of the world, restoring a vital engine to the global economy. Why is there so often that inserted reminder in such stories that, yes, Japan is big and important - and by implication the reporters assigned to report on Japan are big and important too? They're not working in some back alley, see. Not at all. This is big and important! Front desk stuff that YOU SHOULD KNOW ABOUT, BUT DON'T! When was last time the Journal ran an article reminding its readers that A healthier United States would have huge implications for the rest of the world, restoring a vital engine to the global economy? But I digress.]

Credit in Japan for the most part still comes from banks. But doesn't the article say that the banks have reformed? Indeed it does - but only in recognizing bad loans. The article simply omits to mention any reforms in bank policy as to new lending. And it's new lending that determines where real, productive assets go - which, in turn, largely determines whether an economy is going to work.

Big article on Japanese reforms - no mention of new bank lending policy reforms or whether a bond market is developing to break the hold of the banks. Nice.

In the bad old days of the 1980's and before, the Japanese government set much economic policy - the same policy that has created the current more-than-a-decade-morass. The government largely determined which economic entities would get hold of the real, productive assets. And the government accomplished that largely through the banks. Have those Japanese government officials sworn off invasive economic planning and manipulating banks' new lending policies? Who knows? - the Journal just tells us that incompetent government policy-making ... show[s] signs of easing. But we are also told that Japan's economic planners watched with envy the U.S.'s technology-driven boom of the 1990s. So are those eager-beaver, envious Japanese economic planners now determined to keep their mits off the economy and let the market decide where the real productive assets should go? We aren't told. It must not be important.

Of course, in the bad old days the Japanese government encouraged far too much investment in the export sector and capital goods. Has that changed? We aren't told - but the Journal does cheerfully report that signs that things are looking up include: Industrial production is surging, as exports boom and manufacturers invest in new equipment. Are those all parts of the problem or the supposed solution?

Big article on Japanese reforms - no mention of whether the Japanese government is getting out of the bank manipulation and industrial policy businesses. Nice.

How about unresponsive, aged corporate management - management almost completely unresponsive to shareholder needs and largely based on cronyism? Has the huge problem of what the Journal weirdly terms stodgy corporate leadership been addressed? Has there been a broad move towards correcting management incentives and moving away from a seniority/crony system? Who knows? - there's no mention of that, either.

Big article on Japanese reforms - no mention of whether Japanese corporations are taking steps to secure and reward the best managers or avoid cronyism. Nice.

Another huge problem with Japan's allocation of assets was the lack of equity market transparancy and frequent market manipulation - often with the involvement of the government. Are we supposed to believe that Japan fully prosper without a free, unmanipulated stock market? Has there been progress in fixing this problem in Japan? One won't know from reading this Journal article.

Big article on Japanese reforms - no mention of whether Japanese equities markets are less manipulated or more transparent. Nice.

So what the heck is the evidence of a widening realization that Japan must adapt its economic system or face the prospect of a long national decline? Well, it seems that there has been progress in admitting what a bad bank loan is, deflation is "easing," and in the real property market - the management of which all evidence indicates had previously been left entirely to the inmates of institutions housing the hopelessly insane - commercial land has dropped 86% in value in Japan's six biggest urban areas and "For the first time, people now think the value of land depends on the money it can make through rental and development," says Katsunori Yamamoto, a Mitsubishi Estate manager. One is so pleased to see that real estate specialists in Japan have discovered that relationship - especially since the old way of doing things created real property values that needed to be deflated by 86%. But have there been any changes in how, say, a Mitsubishi Estate manager might be chosen or paid? Don't ask - don't tell.

And, of course, we are told: Signs of previously unthinkable strategies are cropping up all over the corporate world. It certainly is nice to read that lots of new things are being done in Japan - lots of new strategies are being adopted. But Japan never lacked for gross activity - the problem came in choosing the correct activities. It's that same old "deployment of real, productive assets" issue that keeps popping up and getting ignored. We are apparently supposed to be charmed that companies across the economy are striving to get their overhead under control: A recent Nikkei newspaper survey of more than 1,000 listed companies showed that because of cost cutting, they could break even with lower revenue than at any time since 1991. But even formal Japanese audit practices don't reveal very much - and reliance on an unidentified "newspaper survey" to determine what companies are "breaking even" must be some kind of joke.

The Journal also tells us with singing optimism:

Also bolstering the recovery: Stock prices had fallen to earth after their wild speculative rise of the 1980s, making many shares look like bargains and bringing buyers back to the market. Land prices, subject to the same speculative fever, also eventually bottomed out, and the government has helped fuel new development with policy changes. Many economists say they expect consumer prices also to start rising again soon.

Yes, yes, it's especially interesting that we're all supposed to be happy and optimistic that economists say they expect consumer prices also to start rising again soon in Japan. Can the reader explain why that particular factoid doesn't make the reader feel all that much more certain that the Japanese economy is really poised to take off?

The fact of the matter is that a Journal reporter who wrote an article even remotely like this one on the United States economy would at least never write another article for the Journal again. But because this article concerns Japan it just fits right in.

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