Taking a Lower Road

The old Japanese definition of "recession"--anything less than 10% annual growth--is now old-hat. Japan is suffering from an unmistakable, deliberately engineered recession, the first step in what Deputy Prime Minister Takeo Fukuda calls a "long and traumatic" transition "to an era of low, stabilized growth."

Early last year the ruling Liberal Democrats determined to put Japan through an anti-inflationary wringer by slashing government spending and boosting interest rates, thus suppressing consumer demand. The policy worked: Japanese wholesale prices, which were zooming up at an annual rate of about 35% a year ago, rose at a yearly pace of less than 4% in May. But industrial production plummeted 21% last year, while capital spending slumped 13% and more than 11,000 companies closed their doors. Even unemployment doubled, to 2.2% in March (joblessness was confined mostly to seasonal and transient laborers). Lately, Japanese businessmen have been accusing the Liberal Democrats of "overkill."

Last week the sleepy-eyed, 70-year-old Fukuda unveiled a modest package of reflationary measures designed to mollify his critics. Key elements: $1.3 billion in new housing loans, $14.5 billion in public works projects, easier terms on car installment payments, and a pledge to award more government contracts to small companies. Combined with a slightly easier monetary policy, the measures should be enough to help trigger a modest recovery during the second half of the year (production rates already are inching up, and jobless rates down). But they are hardly sufficient to bring back the halcyon era of double-digit G.N.P. growth that Japan enjoyed before it was rocked by twin economic shocks in the early 1970s. Dollar devaluations and yen revaluations raised prices of Japanese goods abroad and cut into export earnings; that plus quintupled oil prices touched off the inflationary explosion.

Economic Czar. Says Fukuda: "The economy has suffered deep wounds that will take at least three years to cure." Even after that, in his mind, going back to the old era of hell-for-leather growth would only start "an endless cycle of inflation and deflation." His long-run goal is for the Japanese economy to expand at about a 5% annual rate--only half the average post-World War II pace.

Fukuda seems to have the clout to put his policies through, and lately he has become something of an economic czar. A veteran financial expert and leader of one of the Liberal Democratic Party's strongest factions, he has served several terms as Finance Minister; he was called on to resume that post by former Prime Minister Kakuei Tanaka --with whom Fukuda, to put it mildly, did not get along--when the oil crisis broke in late 1973. When financial scandals forced Tanaka to step down last December, the post of Prime Minister fell to the little-known Takeo Miki, who, lacking a strong background in economics, has pretty much turned over financial matters to Fukuda.

Since Japan nonetheless operates by a consensus system, Fukuda needs cooperation from businessmen and unions to make his program of economic transformation work. Despite some grumbling, he seems to be getting it. Japanese workers won a 32.9% across-the-board pay increase last year but agreed to a raise of only 14% this spring. The awesome force of the Japanese work ethic is still evident. Last year hundreds of thousands of employees, protected by lifetime job guarantees, were paid but told not to come to work. Many responded by voluntarily cleaning factories or popping into retail stores to help sell their companies' products. Explained a Matsushita Electric official: "The workers told us they felt guilty that they were letting the company down in the time of its need, and they refused to go home."

Asian Dependent. Fukuda is under more pressure abroad, from nations that would like to see the world's third largest economy pumped up faster so that the Japanese can buy more foreign products. At a recent meeting of the 24-nation Organization for Economic Cooperation and Development in Paris, Japan was criticized indirectly for being overly preoccupied with its domestic economy to the detriment of other Asian nations; those countries have grown dependent on Japanese growth for their own prosperity. Fukuda recognizes that Japan can ill afford beggar-thy-neighbor policies. "From now on, we all have to cooperate," he concedes. "But the first priority is stabilizing the situations within each country." Meaning: Japan can best fulfill its responsibilities to others by keeping its inflation rate down, at the price of slower growth.

This file is automatically generated by a robot program, so viewer discretion is required.