Forumblog.org - The World Economic Forum Blog: Japan's recovery: where next?

At a press conference before the Roundtable began, Heizo Takenaka, Japan's Minister of State for Financial Services, expressed optimism that Japan's economic recovery can continue. However he also said that further agressive reforms are necessary if Japan is to pull itself fully and completely out of its decade-long economic slump. He said that Prime Minister Junichiro Koizumi is fully committed to such aggressive reform.

Takenaka's message to the forum's opening plenary: the current moment offers a great opportunity not only for Japan but also other Asian countries to accelerate structural economic reforms. The economy is expanding. The world economy is recovering. If we further accelerate our structural reform then we will be able to sustain the economic recovery. Now is a great opportunity to create a virtuous cycle.

Takenaka says Japan is "finally coming back." Last year Japan saw 3.2 percent annual growth and
Japanese stock prices increased by 47%. Non-performing loans are declining. Banking reforms are happening. But this is re-active reform. Japan also needs pro-active reform to enhance productivity and profitability. The important point is that reform is really happening.

Takenaka concludes: "There is no excuse to postpone the reform, or to stop the reform at this moment." He says the greatest fundamental danger to economic expansion is a "kind of complacency." People who say that further reforms are unnecessary because the economy has improved are "totally wrong." Japan, he says, now has an opportunity to create a "virtuous cycle" of reform and growth.

Sir Martin Sorrel observes: greater transparency and greater accountability are the most important from the perspective of the foreign investment community.

At the Annual Meeting in Davos this past January, I moderated a panel titled Making Japan's Recovery Last . Panelists were generally optimistic that the recovery could be sustained, as long as the government continued with structural reforms. However some members of the audience including venture capitalist and WEF GLT Joi Ito expressed concern that the economic upturn would be used as an excuse not to forge ahead with tough reforms. It appears that Takenaka is determined not to let that happen. He says he has the Prime Minister's support. But what about the rest of the Japanese bureaucracy?

(Cartoon by Heng Kim Song)

UPDATE: The session "Brave New Japan?" has just concluded. Overall, panelists were quite optimistic - at least for the short and medium term - about Japan's recovery.

According to the panelists, positive factors include:
- Past recoveries were driven by government spending. This recovery is driven by the private sector.
- Corporations are now very serious about restructuring, unlike in the past.
- Because the government has tackled the bad debt problem, for the first time in many years corporations are no longer so strapped with loan repayments, and actually have money to invest.
- The government (at least Prime Minister Koizumi, Minister Takenaka and their political allies) insists that it is serious about continuing structural reform despite the economic upturn.
- Japan is in a good position to excel as a leader in Asia for technological innovation. The government is now serious about promoting R&D, unlike in the past.

However, a few rather serious long-term obstacles came up:
- Politics: Japan's parliamentary districts are skewed to over-represent rural constituencies and under-represent urban voters who are more likely to support tough reforms. This needs to change if economic policy is going to become more rational and representative.
- Demographics: The aging population and shrinking workforce is a huge long-term problem.
- Labor flexibility: Japan's labor market is not very flexible, there is a large problem of under-employed youth and under-utilization of women even as the workforce is poised to shrink.
- Education: One of the panelists pointed out that Japan's higher education system is not very competitive, which could throw a spanner in the vision of Japan's future as Asia's advanced R&D center.
- External factors: Is Japan's economic health too dependent on China? Many in the room were concerned that this is the case.

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