Confusion rules Japan's economy

JAPAN'S economy is in desperate trouble. Politics, domestic and international, are the main obstacles to putting it right. There is a strong desire among ordinary Japanese for political change and economic recovery. The main barrier to getting either lies in the way the two are confused. The government thinks reform is a solution to both, but reform provides no help for the economy. As it is sold on a false prospectus, its failure to help recovery endangers the whole reform project.

'No growth without reform' has been Prime Minister Junichiro Koizumi's cry. But reform without recovery is unlikely. Koizumi has been popular because of his direct style, which is unusual among Japan's politicians. His only rival has been Makiko Tanaka, the daughter of a former Prime Minister, whom Koizumi has just sacked.

The Prime Minister talks all the time of reform. This is hugely popular, but represents an ill-defined yearning by the Japanese public rather than a clear programme. Reform is seen by most Japanese as an end to the bad old ways, in which corrupt deals were done behind closed doors.

Whenever evidence emerges that such things continue, the public become angry and there have been two major occasions recently. One was the sacking of Foreign Minister Tanaka. She was seen by the public to have been knifed in the back because she was intent on eliminating corruption within the Ministry.

The second was over the disgrace of a company called Snow Brand, which had been relabelling Australian beef as Japanese in order to claim the subsidy on it. The Ministry of Agriculture then said no foreign firm could take over the company as they 'wouldn't understand how things were done in Japan'.

Since doing things the Japanese way was the cause of Snow Brand's disgrace, the assumed failure of comprehension might be thought an advantage. Similar practices have long been the life blood of Europe's Common Agricultural Policy, so it is also likely that the Ministry underestimates foreigners' abilities to match Japanese standards.

While cleaning up Japan is highly desirable, it has nothing to do with the economic problem. This can only be solved by yen weakness, which would put an end to deflation and allow exports to grow. Sadly, the government has not previously seemed to understand this.

Fortunately, there are at last signs of change. Deflation is getting a bad name. The Prime Minister recently asked his Cabinet colleagues to come up with 'ideas for ending deflation'. Pressure to do something grows, with the arrival in Japan of President Bush and the fall in Koizumi's popularity, owing to the sacking of Tanaka.

If the world is lucky, ending deflation will be rebranded as a 'reform'. Popular enthusiasm for the brand name should help overcome resistance from the bureaucrats in the Ministry of Finance and Bank of Japan. Bureaucratic resistance is, however, particularly entrenched in Japan.

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