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Readers' Voices: Volume 3

A tale of two crises and
a blueprint for the revival of Japan

Letter to the Editor of the Financial Times
By Thomas Andersson

Published: May 7 2003 5:00

From Mr Thomas Andersson.

Sir, In his article "A weaker currency will make Japan stronger" (April 2), Kumiharu Shigehara proposed a strategy for Japan to jump-start its economy and break its vicious deflationary circle. The agenda includes a gross devaluation of the yen and levying a special export tax on those industries that stand to gain from windfall profits.

It is interesting to note the striking contrast between Japan's outlook and the turnround displayed by Sweden. In 1990, Japan and Sweden found themselves in equally serious financial trouble, with roots in a bubble economy that displayed significant similarities.

The difference was that the Swedish government and financial authorities joined forces swiftly to address the roots of the problem.

Following an acute crisis that saw real interest rates at 500 per cent, Sweden forced exposure of the massive debts of its financial system, nationalised and/or restructured insolvent banks and allowed equity and property prices to adjust. Confidence was soon restored, almost all taxpayers' rescue money was recuperated and the economy was set on its way towards recovery.

In retrospect, Sweden performed worse than Japan on paper during the early 1990s. However, exports, domestic demand and gross domestic product took off from 1994. In contrast, the Japanese economy weakened gradually, with total domestic demand diminishing for the first time in 1998. Today, the unsettled financial debts keep looming, deflation has taken hold and consumer confidence is slumping.
Japan's share of world exports has declined steadily. Despite real prices higher than anywhere else, and repeated injections of public money, domestic markets, distribution networks and consumer sentiment keep failing to permit greater imports.
In the Yomiuri Shimbun in 1994, I predicted a strong Japanese yen that would reduce standards of living unless appropriate political and economic reform materialised. Almost a decade later, this has still not happened. Currency depreciation would put an end to deflationary expectations and strengthen demand. A weaker yen would reduce pressures for market opening, and technological and organisational renewal.

Currency depreciation is not an instrument for achieving sustained economic growth. It may nevertheless be an important element within a broader, comprehensive package required for cracking the status quo.

The crucial point made by Mr Shigehara is that success will require effective co-ordination between the Bank of Japan and the Japanese government in designing a policy package, spanning the relevant macroeconomic and structural domains.

In the century following the opening of Japanese society and markets in the 1860s, Japan was the fastest-growing economy in the world, with Sweden number two. Unless big Japanese institutions get a comprehensive policy package together, the present saddening slide of this great economic power is likely to continue in days to come.

Thomas Andersson, President, International Organisation for Knowledge Economy and Enterprise Development (IKED), 211 34 Malmö, Sweden