Japan in Crisis (review)

If you slept through the 1990s and missed all of the news about Japan's economic problems—the implosion of the bubble economy, the stagnant growth, the political turmoil after the split of the Liberal Democratic Party, the Asian financial crisis, the banking crisis, and the government's attempts to pull the economy out of a debt and deflation dive—Maswood's book offers a concise and readable chronology to get you up to speed. The story is not a happy one, and it doesn't yet have an ending, but it makes fascinating reading nevertheless.

Journalists have been covering this story for over a decade, and for just as long analysts and commentators have been offering their instant reactions to the most recent developments in the saga of Japan's struggle to break out of its prolonged slump. The challenge for anyone writing a book-length study of Japan's economic problems is to take a step back from the daily headlines and offer coherent answers to two questions: how much progress has Japan made in dealing with these problems, and how can we make sense of the pattern of its response? Maswood does a much better job with the first of these questions than with the second.

Maswood resists the temptation to offer us a strictly negative or positive evaluation of Japan's response and instead gives us an appropriately nuanced view. He argues that in the early years of the decade (up until 1997, to be specific), Japanese bureaucrats and politicians, the nation's banks, and the business community all failed to grasp the seriousness of the economic challenges they faced. They saw the initial postbubble recession as a natural corrective following a period of overexuberance, and although they were aware of the volume of bad debt that had been created by the implosion of the stock and real estate bubbles, they expected much of this to be made good when the economy rebounded. Rather than confronting the problems in the banking system or the underlying sources of this problem in the structures of the economy, they chose to wait and hope that a recovery in the markets would cure the nation's ills.

In the period since 1997, after the Asian financial crisis and the failure of several large financial institutions, he sees evidence of a more concerted effort to deal with the nation's economic problems. He credits the Ministry of Finance for the vision behind its Asian Monetary Fund (AMF) initiative in the months after the Asian financial crisis began. He credits Prime Minister Obuchi Keizo and the ruling and opposition political parties for agreeing on a plan to deal with the banks' bad debt problems in the fall of 1998, in time to avoid a financial crisis. And he credits some of Japan's large companies for biting the bullet and initiating restructuring plans, in some cases by bringing in foreign managers.

Maswood is too attentive to detail, however, to leave us with a narrative that takes a simple "V" shape: decline until 1997 and a positive response ever since. He describes setbacks and flaws in each of the three areas he singles out for some praise. The Asian Monetary Fund initiative, he notes, was virtually strangled at birth by American opposition—though it has since reemerged in the form of bilateral currency swap agreements between Association of South East Asian Nations (ASEAN) countries, China, Japan, and Korea.

The bank reforms of 1998 did not solve the nation's banking problems but rather postponed the day of reckoning. He discusses how the approach focused on weak banks without doing anything to deal with the problem of weak borrowers, thus requiring the government to revisit the issue repeatedly in the period since 1998. In the area of corporate reforms, he credits firms such as Nissan for acting boldly to restructure operations and return to profitability, but he describes how many other firms have taken a more "timid approach" (p. 80), relying on attrition to shrink the...