Bending Adversity: Japan and the Art of Survival (20 page)

Meanwhile, as business conditions improved, the ratio of bad loans to total lending began to edge down in line with Takenaka’s demands. Many of the companies responsible for the bad debts started to recover as a result of strong global demand, particularly from Japan’s booming neighbour, China. Japanese companies had not stood still.
From the mid-1990s, they had been quietly restructuring, taking on fewer new recruits, ditching unprofitable lines of business and merging with rivals. The steel sector, for example, written off in the late 1990s as a has-been industry, had consolidated around four big companies and had staged a spectacular recovery by concentrating on specialist, high-grade steel. By 2003, the sector was producing the same amount of steel as in 1998, roughly 110 million tonnes, with a labour force one-third lower at 92,000 people. That revival was mirrored in other industries. As profits increased, companies could more easily repay their debts, normalizing what had previously been categorized as bad loans. By the end of 2004, the Bank of Japan, until then openly alarmed about the state of the banking system, had declared the worst to be over.

By 2006, non-performing loans had dwindled from an alarming 8 per cent of total bank lending to just 2 per cent.
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Corporate balance sheets returned to healthy levels and profits reached a record high. By mid-2006 the Bank of Japan started raising interest rates – prematurely since deflation had still not been fully conquered – nudging them up to 0.25 per cent. (They had been stuck at zero almost constantly since the late 1990s.) Koji Omi, the finance minister at the time, told me, ‘Fundamentally speaking, the state of the economy is very good.’ Compared with the pessimism and self-flagellation of the previous decade, his quiet affirmation was tantamount to a whoop of victory.

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Japan did, indeed, glide to a fairly strong economic recovery under Koizumi. This probably owed more to the efforts of the private sector and the favourable external environment, particularly insatiable demand from China, than to specific government policies. Measures put in place by the Hashimoto government of the late 1990s had also helped, particularly changes to accounting rules that made it harder for companies to hide losses. Whatever the cause, technically Koizumi oversaw the longest continual period of growth since the war, more than five years of non-stop recovery. The previous longest expansion period, the Izanagi boom – named for a Shinto god no less – was deemed to have ended in 1971, when growth slumped to the then disastrous level of 4.4 per cent from an average 11.5 per cent in the
previous five years. Under Koizumi, of course, Japan’s mature economy couldn’t match anything like that. Still, it did grow at a respectable average rate of 2.4 per cent a year in real terms, with productivity gains by some calculations outpacing those of Britain, France, Germany and the US during most of that period.
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For many of the companies that had been paying down their debt and quietly getting in better shape, the Koizumi years were good. Although the consumer electronics industry had become a pale shadow of itself, other businesses were doing well. Car companies continued to go from strength to strength, and were now considered the best in the world. Toyota became a symbol of quality and was fast on the way to selling more cars than General Motors, which would need a government bailout before the decade was out. Exporters were helped by a change of heart at the usually hair-shirt finance ministry, which ordered massive intervention on the currency markets to keep the yen cheap. That helped exporters by making their products more competitive. Companies that had been on their knees only a few years before found themselves shipping steel, chemicals, components, machine tools and construction equipment to China. Koizumi had said ‘No growth without reform’. A more accurate slogan might have been ‘No growth without China’.

Besides cleaning up the banks, Koizumi’s economic agenda had two other broad elements: cutting public expenditure and deregulating a heavily controlled economy. In his inaugural speech, he had set an overly ambitious goal of limiting Japanese borrowing to Y30 trillion ($260 billion) a year. His cost-cutting had a few key elements. First, he sought to rein in public spending on what he considered white elephant projects – the so-called ‘bridges to nowhere’ that had become a symbol of the failing construction state. Public works accounted for a large slice of expenditure and the construction industry employed no fewer than one in ten Japanese workers.
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His opening assault came when he tried to privatize the debt-laden road corporations, which were financed largely through postal savings. That precipitated a pitched battle with the so-called ‘road tribe’ within the Liberal Democratic Party, many of whom owed their seats to popularity earned through supporting lucrative construction projects. Backing up the ‘road tribe’ was the powerful ministry in charge of construction. The
man Koizumi entrusted to fighting this battle quipped, ‘In the past Japan had the Imperial Army. Now we have the Ministry of Land, Infrastructure and Transport.’
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Koizumi’s drive to cut wasteful spending was mirrored by a few local governors. Best known was Yasuo Tanaka, the leader of Nagano prefecture, a picturesque region in the Japanese alps, who was thrown out of office by the local legislature after declaring a suspension of all dam construction. Tanaka showcased his campaign for transparency by working in an all-glass office known as his ‘crystal room’ and, perhaps less relevantly, by publishing diaries about his hectic sex life under the title
Bump and Grind
. ‘My no-more-dam policy is not only about the environment but also about how to spend our taxes properly,’ he said. ‘These things cost a huge amount of money and most of it goes to general contractors.’
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Tanaka was subsequently re-elected in a blaze of publicity, though not all of Nagano’s residents appreciated his cost-cutting drive. ‘I can’t stand the sight of him,’ one vegetable farmer remonstrated. ‘There are a lot of people – farmers and construction workers – crying at night because there’s no work.’ Though Koizumi remained wildly popular, there were not a few dissenters saying similar things about the crusading prime minister himself.

Koizumi pushed on regardless. In addition to his assault on public works spending, which slowly bore fruit, he cut state pensions and – controversially in an ageing society – raised the amount patients had to contribute towards the cost of medical care. He also sought to reduce the amount of tax revenue the central government transferred to local authorities. None of this proved enough to limit public borrowing as much as Koizumi had hoped, at least not initially. The government missed Koizumi’s pledge to cap borrowing at Y30 trillion. In fiscal 2003, it issued debt worth more than Y36 trillion. Many economic commentators thought that was no bad thing. In a foreshadowing of recent debates in Europe and America about the merits of austerity versus Keynesian counter-cyclical spending, some experts argued that Koizumi’s government needed to spend more in order to offset the parsimony of a private sector still too scared to invest. In his early days, Koizumi actually oversaw an expansion of government borrowing, not the contraction he had promised with his slogan of ‘No growth without pain’. Only in subsequent years, when businesses
revived and tax revenues improved in line with profits, did it become safe to shrink spending. By the end of his term in office, he had succeeded in whittling back the fiscal deficit from 8.2 per cent of GDP in 2002 to about 6 per cent.
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The final part of Koizumi’s economic agenda was deregulation. This was what supply-side economists such as Takenaka regarded as a necessary loosening of controls over economic activity in order to release pent-up entrepreneurship – and hence growth. That meant shrinking the state and being less queasy about allowing so-called ‘zombie companies’ to go bust. It also entailed loosening labour codes and curbing the power of bureaucrats who liked nothing more than a bit of power-enhancing regulation. Despite Koizumi’s ambitious rhetoric, actual progress was slow. He undertook a number of small, if symbolic, battles, but big vested interests, such as farmers and energy producers, escaped largely unscathed. One fight he did take on was over whether to allow regular shops, not just pharmacies, to sell over-the-counter cold medicines, a minor assault on the powerful medical profession which wanted to control prescriptions, for pecuniary as much as safety reasons. Yasuo Fukuda, Koizumi’s chief cabinet secretary and later briefly prime minister himself, once mentioned the cold-medicines victory to me as one of Koizumi’s crowning achievements of deregulation.
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Convenient as this piece of regulation-busting doubtless was for millions of sniffling office workers, it was hardly enough to propel stratospheric growth.

Getting rid of regulations was clearly not going to be easy so Koizumi championed the establishment of special economic zones in which some national rules could be waived. The plan carried with it the echo, if none of the sweeping effect, of the special economic zones that had jump-started growth in Communist China. Fukuoka, a large and forward-thinking city in southern Japan, announced it would take advantage of the scheme by allowing, of all things, robots to walk down the street. Along with neighbouring Kita Kyushu, Fukuoka was a centre of robotic research and city officials wanted to give the industry a push. ‘At the moment, you can’t have robots on the sidewalk or in the street because of traffic and radio-signal regulations,’ the governor of Fukuoka told me earnestly. ‘We are asking the government to deregulate to allow these kind of experiments.’
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Robotic emancipation, like more readily available cold medicine, was probably not going to cure the economy of all its ills. Still, there was a flurry of applications for special-economic-zone status, with no fewer than 650 proposals: hospitals asking for greater leeway on treatment, schools to conduct their lessons in English and farmers in Nagano to be able to brew sake. Who knew they couldn’t? Few of these proposals, on their own, seemed likely to spark a national revival.

Koizumi did push more substantive, if more divisive, attempts at deregulation. Most far-reaching was the further liberalization of labour laws to allow companies to hire more temporary workers, even in manufacturing where big businesses had generally offered full-time – often lifetime – employment. Such policies were credited by some with helping to make Japanese business more competitive, but blamed by others for widening income disparities. ‘If the gap between rich and poor increases, we will see the emergence of an American-style society,’ Ryusuke Kaneko, a 25-year-old musician working as an estate agent, told me with obvious alarm. ‘If things go that way, it will not be a happy time for Japan.’
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Takenaka, for one, was bemused by criticism that Koizumi had destroyed Japanese society with his radical economic agenda. ‘There were many things left undone,’ Koizumi’s former economic tsar told me years later. ‘If we are criticized because we only did a few things, I accept that. But many people criticize the Koizumi administration for too much reform. I find that really strange.’

If economic reform was patchy, Koizumi was more successful in the field of what might be called the ‘political economy’. The most potentially far-reaching and controversial policy he pursued during his tenure was his attempt to privatize the post office, an institution where politics and economics overlapped. Really a huge state piggy bank, the post office had been raided by the Liberal Democratic Party for years as a source of easy income for public works and other popular endeavours. For Koizumi, it was a sprawling symbol of the money politics he so despised.

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In the autumn of 2005, by then more than four years into his premiership, Koizumi electrified Japan by calling a snap general election over
the improbable issue of postal privatization. That year, he had introduced a bill into parliament that would split the post office, which had 24,000 branches up and down the length of Japan, into four parts, each of which would subsequently be privatized. The bill squeaked through the lower house, but it was defeated in the upper house after a mass defection by Liberal Democratic Party legislators opposed to privatizing a beloved national institution. That was when Koizumi sent in the ‘assassins’. Most of them were women, and glamorous ones to boot. Carrying out his threat to destroy his own party if it did not bend to his will, Koizumi dispatched his ‘female ninjas’ – as the press revelled in calling them – to run against the rebels from his own party who had defied him by opposing postal privatization. The ‘assassins’ were mostly celebrities, drawn from all walks of life to ‘kill off’ the professional politicians Koizumi had targeted. Among their number were a former beauty queen, a female newscaster and a television chef, Japan’s equivalent of Martha Stewart – minus the criminal record.

His decision to dissolve parliament had been against all the advice of party grandees who had considered it electoral suicide. But Koizumi was furious at the disloyalty of those who had brought down a privatization bill that had been his lifelong obsession. He took his revenge by sacking the entire government – and rolling the dice. The opposition Democratic Party of Japan could not believe its luck. It began to prepare for office. Initial polls suggested Koizumi’s Liberal Democrats might, indeed, be heading for a crushing defeat. Postal rebels and loyalists alike were terrified of losing their seat or even seeing their party shatter into pieces. If the Liberal Democrats lost power, it would bring to an end half a century of almost uninterrupted rule. Koizumi was visibly animated during the campaign. He toured the country, standing on the rooftop of party buses to defend his policies in an ever-hoarser voice. ‘This election is about postal privatization. Are you for it or are you going to oppose it,’ he challenged a crowd outside Tokyo’s Kamata station.
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On another occasion he hammed, ‘If I am able to achieve postal system privatization, I don’t care if I am killed.’
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