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From Denver 1997 to Birmingham 1998
Country Report


~ Japan Contents ~ Country Objectives ~



While Japan's current economic troubles - its worst in fifty years, accentuates the need for fundamental economic and political reform, the government's seeming unwillingness or inability to adequately address key issues in a timely manner has undermined international confidence in the country's economic prospects.

Less than two weeks after announcing the country's sixth stimulus package since October 1997, Prime Minister Hashimoto once again buckled to intense international pressure. This time, announcing a $30.5bn temporary tax cuts. Erstwhile critics are encouraged by this latest initiative but speculations persist as to why the government waited so long. Another legitimate concern is whether Japanese consumers - will spend or save the additional $500 per annum households will receive over the next two years. Given growing uncertainty among the Japanese population in their government's ability to correctly address structural economic problems, many intend to save rather than to spend the additional money. Outside Japan investors remain cautiously optimistic that the long overdue tax cut may sufficiently stimulate domestic demand and temporarily avert the country's slide into a full-blown recession.

Previous attempts to stem growing criticism and to restore confidence inside and outside the country, Prime Minister Hashimoto unveiled a $125bn economic stimulus package. Despite being the largest ever amount of public money to be pumped into the economy, investors reacted negatively to the package. While a final decisions about the breakdown of the package is forthcoming, near unanimous criticism that the packages' focus on infrastructure projects rather than putting money directly into the pocket of Japanese consumers, would fail to stimulate dormant domestic demand.

Japan's once spectacular growth figures of 10% for now are memories of past. Over the fiscal 1998, Japan's economic growth is expected to slightly exceed 1%, marking an improvement over the zero, year over year, growth recorded during fiscal 1997. The country's current economic problem is punctuated by reduced business earnings, weak capital investment, and an unstable financial system. The country's non-financial sector must also undergo a severe shakeout. Overall, business confidence is at its lowest levels in four years, bankruptcies have reached record levels, and unemployment of 3.6% is expected to climb, as more businesses become insolvent. The yen is at its weakest in seven years.

While the Hashimoto's government decision to implement long overdue tax cuts gives the economy some breathing room in the very short-term, the longer term prospects still requires bold initiatives to deal with the country's basic structural problems and the need for deregulation. Without such policies, the country will continue to lurch from one crisis to another - much the way it has since its bubble economy burst in the early 1990's. However, as time passes the number of tricks in the hat will evaporate and then it will be too late. Among the broader implications of failing to restore confidence in the world's second largest economy will be to significantly undermine international efforts to assist other Asian countries emerge from their current economic crisis. Such a failure could lead to a downturn in the global economy as Asian countries increase their burden on rest of the world not only to absorb their outputs but also as sources of much needed capital.


The government's seeming inability to assume leadership and take quick and decisive action reveals the shortcomings of Japan's political system. The country's highly contentious, consensus based political system and leaden bureaucracy suffocates innovation and creates a political decision making vacuum. Ministers rely excessively on civil servants not only to create policy, produce legislation but also to get laws passed. This coupled with the fractious nature of the coalition governments makes it difficult to achieve quick and coherent policies in times of crisis. The resulting policy paralysis is exemplified by the government's inability to provide details about its $125bn economic stimulus package or the $31.5bn tax cut measures announced in April.

Hashimoto will continue to face persistent attempts to unseat him, especially after announcing the tax cut measures. Given that he will have to reverse his personal commitment to halt the country's escalating debt by 2002. However, in side-stepping the bureaucrats at the once might Ministry of Finance to assemble the stimulus packages, the prime minister is showing that he is willing to assume some leadership in helping its country emerge from this crisis. However, he will not be able to succeed without his ministers demonstrating that they too are capable of assuming the responsibilities required under a changed system. That is to say, to take initiative away from bureaucrats by generating policy ideas and taking leadership in the legislative process.


The current LDP government 41% approval rating is the lowest ever recorded. Low voter turnout among the Japanese during the past decade exemplifies the lack of confidence in the country's politicians and political system. Given widespread economic uncertainty and rising fear of job loss coupled with the country's lack of social safety net, many Japanese believe that they must look after self.

Birmingham Summit

Japan is expected to have a high profile at the Birmingham summit as it can be expected that fellow G-7 leaders led, by President Clinton, will remain vigilant in their calls for Japan to take bolder steps to revive its stalled economy. Although recent policy announcements (tax cuts and implementation of Big Bang) have given the Hashimoto government some reprieve, calls for greater deregulation and increasing market transparency can be expected to continue.

Prepared by Megan Harris and Ash Patel, University of Toronto G8 Research Group, May 1998.

~ Japan Contents ~ Country Objectives ~

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