Two crises

In the comments section of this recent post, I have been accused of overstating Japanese decline and understating the US decline.

I have actually said very little about the economic crisis in the US — and what I have said about Japan is not particularly new. For the most part I have simply updated an argument that I have made since the early days of this blog to take new circumstances into account: Japan is in the midst of systemic, secular decline, akin to the bakumatsu, the end of the Tokugawa shogunate in the mid-nineteenth century. I am far from alone in making this argument; Ozawa Ichiro himself is fond of making it, with the implication that he and the DPJ will be the instrument of Japan's restoration. (Among foreign observers, Michael Zielenziger has made a similar argument.) Japan's decline long predates the current financial crisis. It arguably goes back to the bursting of the bubble and the onset of the "lost decade." The decline has institutional causes, demographic causes, and leadership causes, but these factors all add up to an unmistakable and precipitous drop in the state of the Japanese economy, the post-2001 "boom" notwithstanding.

The current crisis has served merely to illustrate just how fragile the post-2001 "recovery" was and just how little the Japanese economy has changed. As an article in this week's Economist notes, "In the long run, what Japan needs is as clear as it has always been: less dependence on export-led manufacturers, more productive and internationally minded service companies, and a more flexible workforce that welcomes women, older workers and immigrants...For the time being, where the world economy goes, so goes Japan." The Koizumi revolution was still-born. Structural reform was left incomplete before Mr. Koizumi departed. Even worse, Mr. Koizumi failed to destroy the old LDP. He dealt it what may ultimately prove to be a mortal blow, but in the short term he gave the party enough of a boost to ensure that a largely unchanged LDP would continue to hold power during this critical period. But not only did Mr. Koizumi serve to prolong the life of the LDP, he also dealt the DPJ a serious blow. Not only did he steal the opposition party's better ideas, but he also served to draw reformist candidates to the LDP. With Mr. Koizumi as party leader running as an LDP candidate was palpable for young, idealistic reformers. By doing so, Mr. Koizumi deprived the DPJ of candidates who would naturally belong to the DPJ's reform wing. The DPJ's leadership crisis can at least partially be laid at the feet of Mr. Koizumi. The young reformers — now orphaned in the LDP by Mr. Koizumi — may yet leave, but I think that when we assess the impact of Mr. Koizumi's tenure, we must consider this line of reasoning as one of the negative consequences. As a result, Japan now has a ruling party which in the three years since the last general election has turned its back on structural reform (and paying down the debt) and an opposition party that is not nearly as reformist as it could be.

Is it really necessary to spell out again the crisis facing Japan today? The dying regions? The bleak demographic outlook? The national debt? It is hard to overstate the impact of Japan's national debt problem. According to this list, Japan ranks third in the world in debt/GDP ratio at 170%, behind Zimbabwe and Lebanon. The next highest G8 country is Italy, in seventh place at 104%. The numbers will change somewhat in light of various stimulus packages in response to the crisis, but in Japan's case it will only get worse. Granted, the US has a major debt problem of its own, which barring drastic action in the coming years will only worsen. But the US has one important advantage that Japan doesn't have: the dollar remains the world's reserve currency. Despite the crisis, governments and investors are still willing to hold US dollars. This doesn't mean that the US can avoid adjustment (more on this momentarily), but it does give the US government more room for maneuver. Japan's situation is not hopeless — as an anonymous commentator to my earlier post notes (scroll to the bottom), Japan's debt/GDP ratio includes prefectural debt and most of it is held domestically, which gives the government a cushion that the US government may not necessary have.

The consequences of Japan's debt are clear. The government is trapped. How will it revive economic growth, foot the bill for a greater portion of welfare provisions (effectively building a welfare state), and cut its debt to more sustainable levels so that it will be able to do more for its retiring baby boomers? Japan is not alone in this dilemma, but it is feeling the pain particularly acutely.

What about the US?

First, let me say that US elites have been no less incompetent (ideological, short-sighted, arrogant, etc.) than their Japanese counterparts. The biggest difference is that Japanese elites have had years to correct their mistakes. Say what you will about President-elect Obama, but at least American voters had the good sense not to reward the Republican Party with another presidential term. I've seen few signs that the Democratic Party is any better equipped to deal with the crisis, but at least the Republican Party has been sentenced to some time in the wilderness, which one hopes it will use productively.

I have no doubt that this crisis is dire, and that the US has yet to hit bottom. There is still the risk that the recession will become a depression. It is still unclear whether the banking crisis has passed. The Paulson Treasury appears to have mishandled the bailout package.

And then there are the structural problems. To say that America has been living beyond its means is a gross understatement — America has been living as if the very idea of limits didn't exist. No limits to energy consumption. No limits to the US government's ability — by means of its unrivaled military — to reshape the world and provide extended security for the American people. At the same time, the US has neglected its infrastructure, its health care and pensions systems, and, most important for future growth, its education system. Above and beyond these serious problems, Americans and their government have acted as if there were no limit in the rest of the world's demand for US debt.

Americans are now learning the meaning of limits. The question, as Paul Krugman notes, is what the post-crisis economy will look like. He looks at the balance of consumer spending, nonresidential investment, residential investment, government purchases, and net exports and concludes that a smaller trade deficit should step in for lower consumper spending, which means that the US may become more dependent on exports than it has been in the past. Meanwhile, as Niall Ferguson argued in Monday's Washington Post, central to this transformation will be the US relationship with China, a relationship Ferguson describes with the unfortunate word "Chimerica."

"In essence," Ferguson argues, "we need the Chinese to be supportive of U.S. monetary easing and fiscal stimulus by doing more of the same themselves. There needs to be agreement on a gradual reduction of the Chimerican imbalance via increased U.S. exports and increased Chinese imports. The alternative — a sudden reduction of the imbalance via lower U.S. imports and lower Chinese exports — would be horrible.

"There also needs to be an agreement to avoid a rout in the dollar market and the bond market, which is what will happen if the Chinese stop buying U.S. government bonds, the amount of which is now set to increase massively."

The very word Chimerica undoubtedly keeps Japanese officials awake at night, as it captures what has long been the worst nightmare of many Japanese elites: ever closer cooperation between Washington and Beijing. The thought of the economic crisis bringing the US and China closer together, perhaps under the watch of Secretary of State Hillary Clinton, is surely causing a spike in the blood pressure of certain Japanese. (That said, Ferguson does not mention that Japan holds more US treasuries than China, meaning that surely US-Japan bilateral negotiations are no less necessary thank US-China negotiations.) (Correction: As of September, China became the largest holder of US treasuries.)

The adjustment will undoubtedly be painful, particularly for my generation — the so-called millennial generation — which has known only good times (indeed, perhaps the most prosperous period in human history). But America still has, to use Aso Taro's favorite phrase, "latent power," starting with comparably favorable demographics. Interdependence also works in America's favor, as it may have plenty of help from other governments in shifting to a more sustainable footing. The rest of the world still catches America's flu.

Ultimately it is foolish to argue that one country's problems are worse than another's. The developed countries have their collective back to the wall, and not for the first time does the world run the risk of watching an age of unprecedented prosperity collapse into an "era of fear." (It is worth revisiting a Tony Judt essay to which I linked nearly a year ago.) Japan's and America's problems are both severe, but different. For the past two decades, Japan has fallen from a great height, and barring adjustments, it may have further to fall. The US may yet experience a similar decline.

Finally, I must repeat what I said in the comments to the earlier post: I do not celebrate Japan's decline. I lament it, and wish its leaders had done more sooner — and failing that, I wish that they be held responsible for their failures. I don't believe that Mr. Aso is wrong to believe in Japan's latent power, and hope that the government finds a way to release the energy of the Japanese people.

Plus ça change...

There appears to be little doubt that on Thursday Aso Taro will announce a new set of economic measures — and will also announce that he will not schedule an election for the later part of November. Yomiuri reports that Oshima Tadanori, the LDP's parliamentary affairs chairman, has voiced his disagreement with the prime minister's intention to postpone an election, arguing that delaying will make the opposition less willing to cooperate with the government on its agenda. Nikai Toshihiro, METI minister, and Amari Akira, administrative reform minister, have sided with the prime minister, citing the urgency of the global financial crisis.

"Not before the end of November" probably also means not before the end of this year. Asahi speculates that the next possible dates are at year's end after the budget compiliation for the next fiscal year, in January at the start of the next regular session of the Diet, or April, after the passage of the budget. Yamamoto Ichita, however, suggests that delaying now means that it is likely that Mr. Aso will delay until September 2009. I'm with him. Barring an unlikely uptick in Japan's economic fortunes (or in the LDP's standing in public opinion polls), I see no reason why the prime minister would chance an election unless he had no other choice, as will be the case in September.

An Asahi poll suggests that the public is not in a hurry to vote. In a dramatic reversal, 57% of respondents (up from 33%) think that an election is not urgently necessary. The poll contains some less-than-good news for the prime minister, however. It lends support to the idea that the government may be pushing on a string when it comes to building public support with its economic stimulus plans. Respondents were nearly divided on the value of the government's stimulus package, with 40% approving and 41% disapproving. Perhaps the next package will tip the balance, but the government's support may depend on which pages of the newspaper citizens read: are they swayed more by the relentless string of bad news on the financial pages or the promises of stimulus to come on the politics page?

Regardless of how the government will fare in the court of public opinion, the DPJ is already repositioning itself to respond to the delay (beyond calling Mr. Aso a chicken). While Okada Katsuya, the DPJ president who led the party into the last general election, doesn't want to believe that Mr. Aso means what he says, the DPJ appears to be taking Mr. Aso at his word. The response? For now, backing off on a promise not to hold up the government's new bill authorizing the MSDF refueling mission in the upper house. The upper house foreign affairs committee was supposed to vote on the bill Tuesday, but the DPJ's upper house affairs chairman denied an LDP request for a vote. The rejection may be part of a strategic decision by the DPJ to back away from cooperation now that the government is signalling that it will a delay an election.

It is unlikely that the DPJ will uniformly oppose the government, seeing as how it has little to gain from obstructing the government's efforts to respond to the crisis. (At least I hope it will see that there is little sense in being wholly uncooperative — the DPJ is currently mulling its response to the government's plan for shoring up troubled financial institutions.)

In short, the political system is back to where it was when Fukuda Yasuo decided to depart. The DPJ is hungry for an election, the LDP sees no reason to hurry given external events. The DPJ will cooperate with the government on an ad hoc basis, the LDP will paint the DPJ as putting politics before country.

Expect another ten months of this.

Aso pushes back

Prime Minister Aso, holding a press conference in Beijing where he is attending the annual Asia-Europe meeting (ASEM), suggested that in the midst of the current crisis, he will be prioritizing Japan's international role over the "domestic political situation."

The press interpretation of this remark is that Mr. Aso was signaling that he will not call an election for the latter half of November. He is still scheduled to make an announcement regarding election timing by month's end, but it appears unlikely that the prime minister will call for an election by the end of November.

Of course, by Japan's international role, Mr. Aso actually meant domestic stimulus in the hope of replacing vanishing foreign demand for Japanese products with more robust domestic consumer spending. Naturally the means by which to encourage greater domestic consumption have nothing to do with the "domestic political situation" and the LDP's electoral prospects...

The LDP and its partner Komeito are, according to Mainichi, divided over whether to hold an election within the year. Komeito actually used the F-word ("Fukuda") to argue that Mr. Aso should not delay an election, suggesting that if Mr. Aso tarries, the DPJ will become uncooperative yet again, rendering the Aso government a premature lame duck, like the former prime minister. (Apparently Komeito foresees that an election will "untwist" the Diet. Is that because Komeito thinks the LDP is bound to lose its majority?) Finance Minister Nakagawa Shoichi, meanwhile, suggested that it would be irresponsible for the government to call an election in the midst of the current crisis.

What, I wonder, do the LDP's backbenchers make of this? At this point will waiting until the spring or next September make any difference in their electoral prospects? Is it reasonable for the LDP to expect that the economy will look any better in the new year, new stimulus package or no new stimulus package? Does any expect that the Aso government will finally find a way to stimulate sluggish domestic demand in the midst of a crisis that seems to be encouraging anything but consumption? The Bank of Japan has already revised its growth expectations for the 2009 fiscal year down to zero.

MTC suggested Friday that the government could use talk of a future consumption tax increase to encourage more spending in the near term. Maybe, but such suggestions could simply leave citizens outraged and put them in even more of a hanging mood as regards the LDP. For a backbencher, the delay simply means more scare campaign funds spent idling in the non-campaign campaign. Given that the LDP's prospects are unlikely to have improved by the spring, it's probably just as well (from the backbencher's perspective) that the party opt for an election sooner rather than later. Holding an election will at least clarify the muddied political situation.

Of course, from the perspective of Mr. Aso and his cronies, delaying is entirely in their interest. Will the public — already angry at the government for a host of reasons — be charitable to the Aso government and return it to power in the midst of a crisis? The prime minister is better off waiting to see whether the two stimulus packages have some salutary effect before going to the people in a general election. And I doubt Mr. Aso is keen on the idea of potentially being one of the shortest-serving prime ministers ever.

All of which goes to say that the DPJ's new approach of calling Mr. Aso a coward for not calling an election is unlikely to succeed at either forcing Mr. Aso's hand or drastically impacting the prime minister's approval rating.

The LDP looks to delay a general election

His poll numbers slipping (even in Yomiuri, in whose latest poll his approval rating fell 3.6% to 45.9% and his disapproval rating rose 5.2% to 38.6%), the financial system collapsing, the US "passing" Japan on North Korea, and the DPJ refusing to provide an issue with which the government can galvanize public opinion (for now), it is little wonder that Prime Minister Aso Taro is reconsidering calling an early election.

Due to the need for a second round of economic stimulus — I do hope the DPJ, even as it decides to cooperate, as I expect it eventually will, asks the obvious question of why the government needs a second stimulus package when the first one could have been altered to reflect the worsening economic situation — Mr. Aso seems to concur with the public that the government's response to the economic crisis should take precedence over a general election. In the aforementioned Yomiuri poll some seventy percent of respondents said precisely that. Mr. Aso seems happy to oblige.

So too does the LDP. Koga Makoto, the LDP's election strategy chief, suggested that in the current economic environment the LDP "cannot possibly consider" contesting an election. LDP elders are also citing the need to formulate a budget as a reason for delaying the election; if an election isn't held by 16-23 Nov., the government should wait until March or September of next year.

The DPJ is, of course, irate over the idea of waiting until next year to square off with the LDP in a general election it thinks it can win.

But the DPJ should not panic yet. It is by no means guaranteed that the LDP will be able to use the next year to engineer a reversal. The soft support for Mr. Aso is the clearest sign yet that the LDP is running short on options. Even a second stimulus package may not be enough to save the LDP from an electoral defeat, in part because it is not clear how exactly the government will pay for a second stimulus package (that, and the government's looming assumption of a greater share of the burden for pensions). After wracking up debts and mortgaging Japan's future — and then avoiding a debate over how to fix the problem — the LDP seems to have discovered that it is nearing the end of its ability to find creative ways around the budget problem.

Which surely lends itself to the argument that maybe the DPJ deserves a chance at governing, which apparently 58% of respondents in a recent Yomiuri poll now believe.