Last week a staggering $400 billion was wiped off the value of Japanese shares. The Nikkei Index slumped almost a quarter in just three days. This is only the latest in what is still expected to be a long series of nightmare economic news worldwide. Many governments faced with such catastrophic financial indicators are hunkering down to protect their own angry voters. Not so, however, the Japanese. Instead they have announced a $7 billion aid package for poorer Asian countries. The rest of the world should reflect on why they have chosen this radical and arguably courageous course.
One reason the decision by the government of Prime Minister Taro Aso deserves careful consideration is that economically, the Japanese have already been where the rest of the world appears to be heading. After suffering from the initial oil price shock of 1974, Japan’s economy quickly picked up. Thereafter, while America and Europe struggled with downturn, nothing seemed to faze Japanese investors as stocks and property values surged and massive sums were used to buy US Treasury bills to sustain the American economy.
But as in the latest crisis born on Wall Street, there was a fundamental flaw at the heart of Japan’s bounding economy — an unsustainable bubble in asset, particularly property values. When the Japanese central bank tried to prick the bubble, overnight 80 percent was wiped off stock prices. The entire financial and corporate sector, with its elaborate cross-ownership structures, found itself with unserviceable debts and worthless assets. Because regulators did not at first insist bad debts be written off and businesses and banks go bust, Japan was thrown into economic stagnation. Hugely costly and debt-financed public works failed to restart the economy. By seeking to protect its own and discouraging foreigners to buy up distressed assets, Japanese governments merely compounded their problems.
Now Japan is once more staring into the economic abyss but it seems determined not to repeat the mistakes of the 1980s. As Premier Aso said in Davos Friday, the greatest danger to the world economy is for protectionism to re-establish itself. This crisis has to be managed by the rich First World and just as importantly, wealthy countries must support those less fortunate than themselves. The conclusion from watching all the political and business hand-wringing at Davos last week has to be that it is not yet clear if the warnings against protectionism will be heeded. Many governments quite frankly seem to be terrified and fear is always a poor guide. Maybe economic leaders should reflect on how, only a few short months ago, they were extolling the virtues and inevitability of a permanent globalized economy. Such talk was easy in boom times, when confidence and demand were soaring. But if the advantages of globalization were true then, why are they not still true now, when most economies are on the slide? The Japanese with their own recent bitter economic experiences deserve to be listened to, most particularly over the need to support poor countries.
