Mr Yen yearns for political, economic reforms

Eisuke Sakakibara, the man known as "Mr Yen" for his ability to move the currency markets in Japan, spoke to about the urgent need for political and economic reform, if Japan is to fully emerge from the financial crisis and increase productivity and economic growth.

Q: To what extent do you think Japan is now beginning to emerge from the recession?

A: That's very difficult to say. The Japanese economy has a dual structure; one side of the structure is very competitive, export-oriented big companies; like Toyota, NTT DoCoMo. The other is a very domestic sector which in terms of employment occupies something like 85% of the total economy; and the absolute productivity of sectors like distribution, construction, food processing, are extremely low, and they really haven't come out of the major structural problems that they have been confronted with.

So we have the problem sectors which are very large, and structural reform in these sectors has not yet started to take place.

Increasingly, the recovery seems somewhat fragile; towards the end of this year the indicators we are now observing have become somewhat weaker.

Q: Which indicators in particular?

A: The production index for September, which was just released, is weak; it is a negative number compared to the month of August. Consumption still seems to be quite weak, and consumer sentiment has not really improved. And there is the political uncertainty, and the Nikkei Dow has been going down; so I am somewhat afraid that toward the end of the fiscal year, towards the end of March, the Japanese economy may start to falter again. There is that possibility, particularly if the US stock market goes through a major correction, which again, is a major possibility. Nasdaq yesterday (Monday) has recorded a fairly large decline. So, I am beginning to be worried.

Q: If there was a faltering do you think it would have a major impact or be more like a stumble?

A: It would be quite serious. If the Nikkei Dow goes down to 13,000, or even below 13,000, it will probably have a major impact on financial institutions; so that it will probably deal a very serious blow to the Japanese economy, and to the rest of Asia as well. I hope that it won't happen. But there are limited instruments available for the government.

Q: What are they?

A: Fiscal policy cannot be used any more because of the mounting debts. Monetary policy – interest rates have been raised to 0.25%, and there's not much room to lower that. They could increase the quantity of money, but that is limited as well. So we don't have much choice but to embark on very aggressive structural reforms. It seems politically very difficult, particularly with this government.

Q: The political will for major structural reforms isn't there?

A: That’s what I fear. Particularly in regard to distribution, construction, food processing. Agriculture and fishery has become more or less sacrosanct, which they cannot touch. We need to embark on a major deregulation in the agricultural sector, which has become politically extremely difficult under this government;

Q: Why is that?

A: The agricultural area has been the main source of support for the LDP. That is crumbling, but still they are quite strong in the agricultural sectors. No deregulation has taken place in that sector for the last several years.

Small shop retailers have been protected quite heavily. There are lots of subsidies and special taxes for the mom and pop shops and you need to rationalize those sectors, and that has not happened. There are some major structural problems there which are very political.

Q: What do you think would be the forces that could prompt deregulation?

A: First of all you really need to change the political system in this country. That's absolutely necessary, because those distribution, agriculture, and healthcare sectors have been protected politically by the conservative party. That needs to be changed. Or, the LDP [Liberal Democratic Party] has to change.

Q: There seems to be some signs that that's been happening. SOGO was allowed to go bankrupt recently.

A: But it's not really those large department stores, large supermarkets that are the problem; it's the small retail shops which are the problem. Those small retail shops have been given lots of favourable treatment in terms of taxes, subsidies, and those stores which need to exit that industry have not exited. So, I think we have a major structural problem in the domestic sector of the economy.

Q: So what is your worst-case scenario?

A: It could be quite bad. It may generate another round of financial crises. Because 13,000, 12,000 are very difficult levels of the Nikkei for Japanese financial institutions; so we would have a major blow to the Japanese economy.

Q: In your view, how likely is this to happen?

A: Thirty or forty percent. Or maybe 50%. Particularly towards the end of this fiscal year. People are now beginning to get worried. Particularly with the confusion in the political arena.

Q: You said the knock-on effect will go across Asia, are we looking at something as bad as the currency crisis?

A: I don’t know, but given the US economy is slowing, the possibility of the US economy hard landing is probably 40% to 50%; pretty much the same possibility of Japan getting into a serious recession. So if both of them happen, it will be a major problem for the world economy. And the Asian recovery has been supported by exports. Especially by exports, and consumption. And those exports are essentially semi-conductors, computers, and IT related materials. And these prices have plunged, so the market is not really that good. And if the American economy slows down significantly, and has a hard landing, and the Japanese recovery falters, that's a major problem for Asia and for the world, I think.

Q: What would it take for the old economy to improve?

A: Major structural reforms. Which are quite political.

Q: Do you think it is possible that these reforms could take place?

A: Yes, public opinion is now demanding it. Look at all kinds of elections – now in Tochigi prefecture, a new candidate was chosen who was talking about reform of major public investment programs. The traditional candidate, who was supported by all the parties, lost. Even the people in the agricultural sector, in the local community, are now demanding major structural change. It is a question of leadership, of the politicians knowing what the people really want, and trying to embark on major structural reforms. I think that could happen.

Q: With major structural reforms, inevitably there would be a good deal of pain –
unemployment, many businesses going under. Is that of concern?

A: There would be pain in some sectors, but new jobs would be created as well. Look at what has happened to the United States, look what has happened to the United Kingdom. I mean, their unemployment rate has come down, amid the structural reforms ... It's a ‘destructive creation’, which is necessary. I don’t necessarily think that the structural reform would have a negative impact, even in the short-run.

Q: In terms of policy change, how much is the bureaucracy really in control behind the scenes?

A: Politicians are in control. Bureaucrats are there but if the politics changes, many of the young bureaucrats would follow. So this bureaucracy versus politics is not necessarily the right sort of analysis. Probably the Ministry of Finance was the only ministry that was relatively independent from politics. But that ministry has been destroyed now. So the politics are essentially in control. So it's the vested interests of the politicians. It’s the iron triangle: politics, bureaucracy and vested interests. And you need to break that. You need to change the old-style LDP politics.

We may need another crisis to really come up with a successful strategy for structural reform. The sense of crisis is lacking now. And in order to really think about major structural change you need some sort of sense of crisis. You can personalize that lack of a sense of crisis in Prime Minister Mori. He's a nice person, but he doesn't have a sense of crisis.

Q: When you talk about changing the political system, do you mean the way decisions are made, or elections, or the way people are nominated?

A: The way that elections are being held; and the way that the election is organized by the conservative party, and the way candidates are chosen. And they sort of rely on vested interests, and construction groups; but that is now failing. They are now beginning to lose elections that way. So, even the conservative party realizes that old style politics does not work any more. They are beginning to change. And major change could probably happen in a matter of the next two to three years.

Q: As long as you have a democratic system, people will get fed up and exercise their voting power?

A: They are already fed up.

Q: Do you think the change will happen without social unrest?

A: It would happen with political turmoil and political instability, but not social unrest. Socially, Japan is still quite stable.

Q: How long do you think that might last?

A: To reach the level of the United States it will take 100, 200 years.

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