Editorial: Drastic reform could help avert Japanese crisis

Last month, Japanese Prime Minister Yasuo Fukuda resigned suddenly, leaving the ruling Liberal Democratic Party somewhat adrift and the government tied in knots as the economy drifts toward recession.

This makes him the second Japanese prime minister to stay in office for less than a year. A country that has been viewed as a model of stability seems to have developed something close to a permanent governing crisis.

The immediate cause of the crisis is a parliamentary deadlock. The Liberal Democratic Party ruled Japan for decades as virtually the sole holder of power but during the economic crisis of the 1990s the opposition Democratic Party of Japan gained enough seats in parliament to make decisions difficult. Fukuda and his predecessor, Shinzo Abe, did not have sufficient popularity to break the deadlock.

The deeper reason for Japan’s crisis, however, is it has never reformed its heavily government-guided economic system of crony capitalism, which may be given some credit for Japan’s dramatic economic growth from the 1950s through the 1980s but has proved unsustainable.

After World War II, the powerful Ministry of International Trade and Industry dictated or heavily influenced what businesses and industries would be favored, especially with being admitted into the closely knit associations among manufacturers, suppliers, distributors and banks, called keiretsu, which manipulated funds and credit to make sure that members didn’t fail. With the economy directed toward exports, this arrangement worked well enough to be hailed as an economic miracle for more than 20 years.

However, these cozy associations created all too many companies deemed “too big to fail” even when they made poor decisions or borrowed too heavily or otherwise got into trouble.

The “bubble” burst in the early 1990s and the economy went into a period of stagnation. Instead of allowing failing companies to fail, the government and the banks kept propping them up.

Thus money and other resources were and are misallocated on an enormous scale, which deters significant economic growth.

Reform is almost impossible because many of the companies that should be subject to market discipline are politically influential. Thus the political system is virtually paralyzed.

Liberal Democratic Party Secretary General Taro Aso is considered the leading candidate to become prime minister, but the LDP must call for new elections next year.

That doesn’t leave the new prime minister much time.

His best bet would be to introduce dramatic market-oriented reforms and push hard for them, despite resistance from entrenched interests. But even that carries no guarantee of success.