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Sheila Smith on Japan’s role in the global financial crisis

In a recent article posted at the Council on Foreign Relations, Senior Fellow Sheila A. Smith writes that “expectations are high that Japan can bring its economic expertise as well as its cash to the table as global economic institutions are reconfigured to meet the scope of the challenge [of the global financial crisis].”

First, it frightens me to hear talk of Japan’s “economic expertise.” Many commentators have pointed out the errors committed by the Bank of Japan and others in the wake of the bursting of Japan asset bubble. Further, Japan is expecting a 6 trillion yen shortfall in tax revenue for the current fiscal year, and its bureaucrats still seem unable to price in a falling birthrate, despite the fact that it has been happening for about three decades.

Japan has plenty of experience in dealing with the sort of economic malaise that follows a burst bubble, but no meaningful experience in terms of actually solving such a problem, which is why zilch came of Japan’s participation in the recent G20 meetings.

Second, the idea of Japan meaningfully contributing funds towards solving the global recession seems absurd at best. The current prime minister is fully devoted to spending money domestically, in order to prop up jobs and (hopefully) spur domestic demand, in an attempt to save his party in the next general election. Japan has offered to provide the IMF with a large amount of funds, but three things make me think that such a contribution will make little difference: 1) It hasn’t happened yet, 2) The current government is under siege and needs to spend domestically in a desperate attempt to keep itself in power, and 3) The money would be misspent anyway (look at the failure known as TARP), and hardly make a difference.

Towards the end of the article we see this:

Japan desperately needs to get its fiscal house in order as it seeks to cope with growing domestic demands for government spending on social infrastructure. The Japanese national debt is the highest of the advanced industrial economies. Longer demographic trends suggest the need for ever-greater fiscal outlays to provide for pensions and health care to meet the needs of the world’s most rapidly aging population. A major restructuring of Japan’s tax code to meet the soon-to-be exponentially increasing fiscal demands on the state for social welfare will come at precisely the time when Japanese households are likely to be reeling from the impact of the global economic downturn.

This is spot-on, and basically explains why Japan will be unable to meaningfully contribute funds to the international community - doing so would only bring it into more debt. The author then acknowledges where the pressure for Japan to contribute is coming from:

Expectations for Japan’s global engagement are higher abroad than at home.

I would say they are far, far higher abroad; global engagement would only anger domestic voters - note how Japan is backing off from overseas development aid to Vietnam, under the flimsiest of circumstances. Expectations at home are that the kokumin will be taken care of, and thus domestic political conditions will most likely render any meaningful global intervention impossible. The government would need to sell such a package to the public by explaining the importance of export-dependent jobs. No hint of such a strategy has been seen thus far - the current prime minister is far too preoccupied and short-sighted for such an adventure, though he may continue to talk up Japan’s global role in an attempt to grab headlines, which is all we’ve seen thus far.

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