Lincoln (Neb.) - Oct. 23, 1998 - Likening Japan to "a car without oil in its engine," a University of Nebraska-Lincoln economist said the world's second largest economy will need a major jolt if it is to pull out of recession and become the major regional and world power it aspires to be.
Japan's banking and financial system has virtually ceased to operate, said Scott Fuess, who spent late April through July as the first visiting foreign scholar in the School of Economics at Tokyo's Senshu University.
"If we think of banking as the oil that lubricates the economy by shifting funds and making them available where they're needed, then Japan's economy reminds me of an engine without oil," Fuess said. "Japan is trying to operate a sophisticated economy without banking and we all know that when you run a car without oil, eventually major damage occurs."
As a result, the Japanese economy is in recession, having experienced three consecutive quarters of economic shrinkage. Unemployment is at a record 4.5 percent as measured by the Japanese government (but Fuess said U.S. measurements would put it at almost twice that) and there is a great deal of underemployment among older male office workers, making it extremely difficult for young people, especially women, to find jobs.
The nation's real estate market has collapsed, leading to a huge number of defaults on loans and a major recession in the construction industry. Meanwhile, the stock market has dropped by almost two-thirds. All this, Fuess said, has created an "appalling pessimism" among the public, causing them to save even more and spend even less than normal, creating a slump in the retail sector. At the same time, the government of the Liberal Democratic Party appears incapable or unwilling to do anything.
"It's just one nasty, contagious effect that arises because the financial sector in the 1990s has collapsed," Fuess said. "It's an economy, to use a phrase from the late '70s in the U.S., that is in 'economic malaise.'"
And it's probably going to have to get worse before it gets better.
"A major, high-profile bank is probably going to have to go insolvent," he said. "It would probably have to be a shock of that magnitude before the government becomes serious about trying to tackle the banking problem, which is likely to happen."
Japanese opinion leaders, however, seem to be content to direct their ire at the United States for offering advice on how to clean up the economic mess.
"I was surprised how much hostility was expressed in the press at the U.S." Fuess said. "There is a feeling that the U.S. is gloating about Japan's misfortune - much as we resented the Japanese lecturing us about being 'lazy' in the early 1980s - and I was amazed at the extent to which (U.S. Treasury Secretary) Robert Rubin was considered a villain. They don't like him because he has the audacity to mention unpleasant truths in public.
"Japan wants a greater role in world affairs, but when the time comes and there are some difficulties in Japan's neighborhood, Japan's not there. Its efforts have been token, at best, and one of the reasons Japan isn't there is it isn't in any financial condition to do so. The U.S. has pointed this out and Japan resents it."
Fuess said he is disappointed by the crisis, because it shouldn't have to happen. A cause for hope is that it is possible to turn the situation around.
"A country like Indonesia really doesn't have the
ingredients to resurrect its economy. Japan does - but Japan's in
denial. It's an economy in slow motion that's winding itself
down. That's disheartening because it doesn't have to be that
way. But as long as it is, Japan can't take any kind of
leadership position in Asia or in the world. It can't be relied
on to be a partner."
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