Hamish McRae: Post election, what do the Japanese really want to do with their country?

Economic Life: The new government may encourage greater competition to the domestic market
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Could post-election Japan regain its position as the most dynamic economy of the developed world? Or will it continue to be its slowest-growing? These elections are one of those inflexion points where the country could go either way. To say that is not to assert that the victory by the Democratic Party of Japan (DPJ) changes everything. It may well be the catalyst for change but even that is not assured. For this is not a simple matter of politics but something much more fundamental: what do the Japanese people really want to do with their country?

Step back a moment and try to recall how Japan was regarded a generation ago. At the end of the 1980s it was at the height of its long boom. It was, in terms of GDP per head, the richest country on earth. Property prices were astounding, with the land under the Emperor's palace in the centre of Tokyo worth more than California. Japan's exporters were conquering world markets, its property companies were buying the Rockefeller Plaza on Manhattan, and the yen was soaring.

Unsurprisingly, economic success led to a certain arrogance. I remember being in Tokyo at the time of the 1987 global stock market crash. I was talking with the head of a large insurance company, who had to leave to take a phone call. He beamed when he came back. It had been the Ministry of Finance on the line, giving guidance to start buying on Wall Street to support the market. "Japan," he said, "will save America."

As it turned out, 1990 marked the peak of the boom. Though Japan suffered less than some other countries from the subsequent slump, it was alone in failing to recover from it. Commentators talk of the "lost decade", but the country's economy has barely grown for longer still. That failure has become an object lesson for policy-makers now. That is why interest rates were cut so swiftly last year; Japan delayed cutting rates for 18 months after its crash. And it is why some Western government will be cautious about correcting their fiscal deficits (unless they are forced to by the markets), for Japan did so too swiftly and managed to abort the recovery. There are other criticisms too, in particular the inappropriate infrastructure programme, where money was spent more to bolster political support than to design the projects that were really needed.

Or that at least is the conventional explanation and, at one level, it is fair enough. I feel, however, that it is slightly unsatisfactory for there are other features which have impeded growth. One the Japanese cannot do much about, at least in the short term. That is demography. Japan has a shrinking population, one that is shrinking faster than any other large developed economy. But another it can. That is the failure to bring in structural reforms designed to foster growth. The economy is very tightly regulated, with planning controls that inhibit people building larger homes and other regulations that make it hard to set up a business. The result is a two-tier economy. The big Japanese exporters are as innovative as ever, producing world-beating products. But there is a second tier of domestically oriented firms that are more plodding, with many able to survive only because they are kept going by their bankers.

If you visit Tokyo you see a shining, modern city: one that is extraordinarily clean and calm by the standards of the UK. I have not travelled outside the capital recently but I am told the further you go, the greater the obvious social strains resulting from the lack of growth. The whole country is gradually getting poorer. Nominal cash wages in June were 7 per cent lower than they were a year earlier. Growth has resumed last quarter, but unemployment is nearly 6 per cent – high by Japanese standards given the cultural resistance to signing on the register. Even in Tokyo that self-confidence of 20 years ago is quite gone. I admire the society for many things, including making the world's largest city the world's safest in terms of street crime. But now the world looks to China for economic dynamism, not Japan.

Back to whether the people really want to change. The stated economic programme of the DPJ is not so different from that of the Liberal Democratic Party (LDP) that has ruled Japan almost continuously since 1955. There are some tax cuts, including fuel prices and highway tolls. There is more money for tuition in schools and for child care. There are tax cuts for small businesses and efforts to boost employment. And all this is going to be paid for by cutting bureaucratic waste. Stated like that, it all looks a bit glum. In terms of policy it looks like more of the same.

There is an obvious personality point to be made that the leader of the DPJ, Yukio Hatoyama, is a member of Japan's most prominent political family. His great-grandfather was speaker of the lower house of parliament, his grandfather was prime minister and his father was foreign minister. He was first elected in 1986 as a member of the Liberal Democrats, leaving the party in 1993 to found what eventually became the DJP. So this is not an outsider, a new broom coming in to foster something akin to the Thatcher revolution. But I have quite a lot of faith in the sort of people who are advising the DJP. Given time, the new government may develop structural policies that bring greater competition to the domestic market. Simply, the country needs to find ways of injecting the same competitive drive into domestic businesses, particularly in the service industries, as it has already got in its exporting industries. That means deregulation – making the somewhat cosy life of many domestic businesses rather tougher.

In the short-run, such reforms are bound to cause disruption. So the question is really whether the new government can tap into the country's present frustration with its poor economic performance and deliver enough success in the next three years or so to enable it to sustain political support for a continuing process of deregulation. It comes back to the point: what do the Japanese people really want? You do get these big changes in national mood in Japan, as elsewhere. There was one in the mid-1950s, when the pretty chaotic conditions of the early 1950s were transformed by the election of the LDP. There was another after 1990 when Japan abandoned its growth ambitions – when it no longer wanted to "save America" as the insurance executive said. And now maybe there will be another, a desire to shake up the country once again.