Worst yet to come in Japan

By Yoke Har Lee

The Japanese industrial sector will face a sharp contraction as the banking sector's size shrinks. Unemployment will jump up as a result and test the tenacity of Japan's current political system.

To meet the challenges posed by this restructuring, Japan has to completely remodel itself, said Professor Haruo Shimada, economist from Keio University and a outspoken adviser to the Japanese Government.

"The banking sector will shrink to about half the size it is now in about five to 10 years. This will have a mirror image on the rest of the industries in the country. They will have to shrink," Professor Shimada told the Business Herald.

He was in Auckland to speak at a function organised by the University of Auckland's Apec Study Centre.

In March, the Japanese Government pumped 7.5 trillion yen out of a pool of 25 trillion yen into 15 under-capitalised Japanese national banks as part of their restructuring plans. Although this has been seen as a positive move for the banking sector, Professor Shimada said it was the least of Japan's impending problems.

Excess capacity in the industrial sector, ranging from 10-30 per cent, will bump up unemployment, Professor Shimada said. "The Government is now trying to facilitate tax exemptions for those companies who make a major scaling down (of capacity). I think this will be done sometime in the summer or so.

"This will mean a large number of employees associated with excess equipment will have to be dismissed. And the unemployment rate, currently at 4-6 per cent, is going to go up to 5, 7 or 8 per cent. This will dampen the economy seriously - the loss of income, loss of consumption."

Professor Shimada has been vocal in his views about why an entire overhaul of the Japanese system is needed.

He was quoted last year as saying that Japan, which has spent 70 years muddled in a Government-controlled system, was not globally competitive.

It would take Japan between five and 10 years to get on to a full-scale recovery, he said. "The fastest, I think, will be about five years. Japan needs to completely remodel itself to meet the challenges of the new era. Things are quite different from the latter half of the 20th century where the world's trade was expanding and Japan was strategically positioned to benefit from the expansion of trade. But now, Japan can no longer enjoy that kind of benefit."

He added that the stockmarket seemed to approve of the banks' restructuring. "I think the market knows what Japan needs is a major transformation, a major shift in paradigm - from a system which has been working well for the last half century to a new system which is viable for the coming century. It is an interesting time but also a very difficult time."