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Japan’s economic malaise to continue

THE Japanese economy continues to plunge into oblivion.

For the first time since 1984 the Nikkei Dow fell below the psychologically important 11,000-point barrier. For an index that at one time threatened the 42,000-point barrier, this was a major decline. The banks in Japan, which are burdened by huge levels of doubtful and bad debts, led the way with the plunge.

There are growing concerns for the state of the world’s second largest economy. Last week the unemployment data hit their highest level on record when a figure of around 5 per cent was released. By the time this column goes to print the GDP figures will have been released. The consensus of opinion is that there will be a further contraction in that economy.

So, there we have the complete trifecta – a falling sharemarket, a record unemploy-ment rate and an economy that is contracting even further. This is, of course, going to lead to further unemployment and the possibility of more bad loans to the banks. Already the bad loans are estimated to be in the billions of yen.

Prime Minister Koizumi has made all the right sounds about recognising the poor state of the banking system. This is, in itself, a major step forward in comparison to what previous Prime Ministers have done.

But recognition of the problem is a very preliminary step in addressing the issues involved. The issues have grown to a point where there is serious doubt as to the viability of that economy.

One of the more astute “Japan-watchers” in the world is Paul Krugman, Professor of Economics at Princeton University. He has observed the state of that market over many years and takes a very keen interest in the policies and structures of Japan. His latest missive about Japan starts rather bleakly with: “The state of Japan is a scandal, an outrage, a reproach. It is not, at least so far, a human disaster like Indonesia or Brazil. But Japan’s economic malaise is uniquely gratuitous. Sixty years after Keynes, a great nation – a country with a stable and effective government, a massive net creditor, subject to none of the constraints that lesser economies face – is operating far below its productive capacity, simply because its consumers and investors do not spend enough. That should not happen. In allowing it to happen, and to continue year after year, Japan’s economic officials have subtracted value from their nation and the world as a whole on a truly heroic scale.”

Krugman’s thesis is that Japan’s problems are not insurmountable. He sees the problems as having arisen from a case where straightforward economic analysis is in conflict with policy orthodoxy.

As he sees it, if you apply the most fundamental of macro-economic policies to Japan’s problems you will come up with a solution that would solve the problem but would also be anathema to the nation’s bankers and policy makers.

When there is a reluctance on the part of policy makers to address the issues in the detail that Krugman sees as being necessary to counter the economic problems, that raises the question as to whether there will ever be adequate reform to turn that economy around.

Japan is still our major trading partner. While there has not been a major impact on our trading position, this is probably more reflective of the low Australian dollar.

If the dollar were to rise from its current position, this could put a certain amount of stress on the Australian/Japanese trading position.

It is hoped therefore, that the policy makers in Japan do come to the Krugman view and start applying some economic theory to their malaise.

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