Almost two decades after their bubble economy turned to economic stagnation, Japanese voters have dealt a hammer blow to their corrupt one-party political system. After more than a half century of dominance, the Liberal Democratic Party was trounced by the surging Democratic Party. Economically, the problem for Japan and the U.S. is that the Democratic Party is even less free market than its Liberal Democratic counterpart.
Former Liberal Democratic Prime Minister Junichiro Koizumi had instituted some limited market reforms – for example, cutting off financing for Japanese companies that were on life support and beginning to free up Japan’s sclerotic labor market – to attempt to jolt the long-stagnant economy out of its doldrums. Yet Yukio Hatoyama, the Democratic Party’s likely new prime minister, seems unlikely to continue such reforms and has advocated eschewing "American-style capitalism." Curiously, he blames recent American policy for poor Japanese economic performance that stretches back as far as the eye can see. Blaming foreigners for a country’s economic mismanagement is a time-tested way for politicians to acquire or stay in power, but the seeds of Japan’s economic woes date back to its "economic miracle" that began in the ashes of World War II.
After being devastated by American bombing during the war, the industrious Japanese people used their know-how and organizational skills to rapidly rebuild their war-torn economy, sometimes borrowing managerial techniques from the West. But that rebuilding was never done in an American-style free market manner. The Japanese government chose to create an export-driven economy by using industrial policy (central planning) to direct resources to favored manufacturing companies that could sell their products into the world market – for example, cars, consumer electronics, and heavy machinery. However, the vast bulk of the Japanese economy is the non-exporting service sector, which is afflicted by numerous regulations and subsidies that protect existing inefficient companies and establish barriers to entry for fresh competition from domestic and foreign sources.
Also, in a society that abhors unemployment, the Japanese government subsidizes companies to retain excess workers. Finally, over the last two decades, the failure of repeated attempts by the Japanese government to use Keynesian fiscal policy to artificially spike consumer demand (pushing on a string) has merely left Japan an annual budget deficit of 10 percent of GDP and a government debt of almost 100 percent of GDP. (With an annual deficit of more than 11 percent of GDP and a mounting public debt, however, the U.S. has little room to talk.)
It is amazing in Japan that 20 years of failed Keynesian policies have led to a hatred of "American-style free-market reforms," when the Japanese government had tried quite the opposite. Credit (actually, debit) the Democratic Party’s "blame the foreigner" political rhetoric. Of course, in a globalized economy, America and other nations of the world have been and will continue to be hurt by the Japanese failure to be clear on what has caused their perpetual economic woes – not American free-market reforms but the timidity of the ones that were adopted.
But the Japanese election is not all bad. A republic with some competition politically – two viable parties – is better than a one-party state with none. A corrupt dominant party shoveling out subsidies and favorable regulations to certain businesses, without any check, is how the Japanese economy got into the current mess. Also, laudably, the Democratic Party vows to undertake the Herculean task of taming the Japanese bureaucracy, which really runs Japan.
Lastly, what is viewed with apprehension in American foreign policy circles – the Democratic Party’s vow to have a more equal alliance with the United States – could actually be a blessing in disguise. Whether not it will ever come to fruition, there has been some talk of reducing or eliminating the U.S. military presence in Japan. Reducing Japanese dependency on a U.S. defense shield could help cut the gaping U.S. budget deficit and lessen the chance that the U.S. would be dragged into unnecessary wars in Asia. Although the Japanese have had economic problems, they are still a wealthy country and should do more for their own defense.
In the economic area, let’s hope the Japanese Democratic Party was just posturing to win the election; but hopefully it will do more than posture in its taming of the Japanese bureaucracy and its lessening of dependence on the U.S. for defense.