Taro Aso: Is Japan's new Prime Minister a Conservative or a Maverick

Last week, I explored Japan's place in the world rather obliquely through the current American financial crisis, and what kind of model Japan's financial could provide moving forward. Two Japanese banks, Nomura Bank and MUFJ seem to be taking advantage of their own financial health vis-a-vis America's banks by buying Lehman Brother's Asian assets and a 20% share in Morgan Stanley, respectively. However in the Japanese news, the American financial crisis has largely been overshadowed by the coming of a new Prime Minister, Taro Aso. He is Japan's third Prime Minister in three years, reflecting the unpopularity of their party the Liberal Democratic Party. Accordingly, when searching blogs concerned with Japanese issues, I found them to be primarily concerned with Taro Aso, and what should of policies he might introduce to Japan during his tenure as Prime Minister. Taro Aso is not a new-comer to Japanese politics, but rather a seasoned politician from a political family; his grandfather was former Prime Minister Yoshida Sheguru. For the most part, Taro Aso has been portrayed as deeply conservative by the primary western media outlets. While there is truth to this statement, I believe that Aso is more than just the typical conservative plutocrat from the Liberal Democratic Party, Japan's defacto political party. Those politicians tend to be in the vein of the recently resigned Fukuda seemingly lacking in the political personality or energy to accomplish change, conservative or otherwise. My first exposure to Taro Aso was last year, when he was on a popular morning news program to campaign in support of the late Fukuda. I immediately noticed that his charisma and spunk differentiated him from the average, geriatric member of the LDP. The blogs I read seemed to paint a more three dimensional portrait of Taro Aso.　However, they also highlight his shortcomings, particularly in choosing his current cabinet members. The question facing the Japanese is similar to the one facing American's concerning John McCain: is he a maverick or just one of the "good old boys"?
The first blog I read was titled Aso's Beautiful Country, and emphasized the reformist nature of his speech to the Japanese Diet. The blog, Observing Japan, is written by Tobias Harris, a current graduate student at MIT and contributor to various new outlets concerning Japan. The second blog I commented on is called the East Asia Forum, and it is a blog dedicated to East Asian policy issues. I commented on an article titled "The Aso Cabinet Circus" written by Shiro Armstrong who is a phD candidate at Australia National Universty in International and Development Economics. I have posted my comments to their respective blogs. Additionaly, I have included the posts below and easily links to access their blogs for your convenience.

Comment:

Tobias, thank you for your series of posts concerning Taro Aso, Japan's new Prime Minister. I agree with your assertions that Taro Aso is not your average LDP politician, but rather an interesting and dynamic man who seems keen on restoring Japan's position in the world. I particularly enjoyed your comparison of Taro Aso's vision for Japan with that of former Prime Minister Abe. You state that in Abe's vision, Japan's postwar system was, "an extended detour from the path Japan ought to follow." I am curious to in what ways that system does not fit into Abe's vision for Japan, and really what kind of vision did Abe hold for Japan? I agree with your assessment that Taro Aso holds the post-war Japanese system in esteem and essentially see reform as turning Japan back towards the ideals held by that system. Notably in his recent speech to the Diet, Aso was very clear the he believes that the LDP has been systematically failing the Japanese public through its inaction and lax attitude towards their well-being. Do you think that this speech has the opportunity to produce real change in the current political situation in Japan, either by spurring the LDP to take action or serve as starting point for the end of their political dominance in the upcoming election? I believe that Taro Aso seems to have the energy to make a real difference to the current political landscape, either through solving a few of the current policy issues or fail to do so and in the process mar the LDP beyond repair. I am more inclined it will be the latter, not because the issues facing Japan seem particularly grave (at least compared to those facing the U.S. at the moment), but rather since Aso seems to be setting himself up for failure. His vision for Japan is regressive and does not take into account the problems facing Japan during this age of globalization. Additionaly, his cabinet appointments seem to be designed to produce the most dysfunctional cabinet possible. Finally, I think his first proposal smacks of typical LDP economic policy: spend until economic recovery comes. I am not quite sure those are quite the right set of policy tools to the table to "repair" Japan's economy or solve future pension issues. I do not believe that a simple return to the LDP of the past will be enough to solve Japan's problems, although I believe many of those value such as egalitarianism and frugality are importance in determining Japan's new direction. Japan's future problems are quite different than those of the past, and it will require new government solutions and real reform to solve them.

Comment:

Shiro, I thoroughly enjoyed your post about Taro Aso's new cabinet choices. While Taro Aso seems to have challenged the LDP to do a better job in his speech to the Diet, he choices seem hardly be live up to that rhetoric. Your post further leads me to the conclusion, that despite his energetic profile and his family's political history, that Aso will be incapable of solving the political problems facing Japan. These problems of course include a rapidly aging population, a large government debt, ineffective government monitoring of the food industry, as well as the threat of a recession. His criticism of the LDP for failing to solve these problems was warranted. However, his cabinet appointments seem to make a mockery of his speech and make him appear a hypocrite. Particularly his choice of Hatoyama, known as the "Angel of Death", as Minister of Internal Affairs and Communications seems to be a bad decision giving the current rice scandal. Furthermore, I was shocked to read in The Economist, that Nakagawa Shoichi, when called upon by a reporter form the The Economist, was found, "in erratic form, with his shirt unbuttoned to the waist." Such a choice for Finance Minister during a global financial crisis seems to be asking for public backlash. Given Taro's recent speech, do you think that it is possible that Taro Aso may be trying to force reform on the LDP by basically engineering electoral defeat in the upcoming election? Does he feel that perhaps, like Koizumi, that perhaps the only way to effectively "fix" Japan and its current problems the LDP grip on power must be broken, and the electoral system opened to true competition? Perhaps a multi-party system and the political competition it brings is necessary to produce policy that will be able to move Japan into the future.

Searching for a Cure: Financial Sector lessons from Japan

As the meltdown of the U.S. financial system continues apace, building on the already considerable losses from earlier in the year, the looming questions are “what went wrong?” and “ how do we fix it?” Each day the magnitude of the crisis seems to be getting worse. The tally reached a benchmark of $379 billion in July of this year, and is now estimated to have losses easily surpassing the trillions of dollars. In short, this is the worst financial crisis the U.S. has faced since the stock market crash of 1929. We now have to reevaluate what the real purpose of the U.S. financial system is, and what degree of regulation is necessary to achieve that vision.

Since the Japanese economic model was dismissed in 1989, the U.S. has been the predominant economic and financial model: advocating free markets and even greater liberalization of capital markets. The U.S. vision for the financial markets was one in which government played little to no regulatory role, where the markets would ultimately decide the direction of capital flows. In contrast to the U.S. model, Japan long advocated controlled use of capital through coordination between the government, banking, and industrial sectors. However, while Japan’s economy has quietly grown at a modest pace of 1-2% over the past 17 years, it has been outpaced by the stellar growth that the U.S. economy registered during the same period. In fact, when one takes a deeper look at the existing data a much different picture emerges as to which economy was better serviced by their respective financial systems.

With the gradual deregulation of the U.S. financial system, the economy adjusted to increasingly plentiful lines of credit by beginning a binge of borrowing. Not only did the U.S. government accrue debt at an alarming rate, the average American household used easy credit by borrowing against the value of their house, to fund a 15 year spending spree. At the same time, despite high economic growth, there has been a steep rise in income disparities , and due to rising prices, an actual decrease in living standards for the majority of Americans after 2001. This created an American economy that relied too heavily on credit borrowed from abroad and one too heavily focused around financial services as a basis of the economy.

Although often criticized for growth rates that were considered too sluggish, during the same 17 year period Japan's economy managed to increase its trade surplus, household savings rates, and standard of living. Notably, such developments occurred in tandem with a reformation of the banking sector. The Japanese financial system is based on managed and cooperative use of capital. This involves cooperation between the government, large banks, and large companies to direct capital to towards areas of the economy that need capital. In a word, the Japanese financial sector still functions as a market, as the big banks still function in respect to profit, however the use of their money and speculation is more closely monitored than in the deregulated American system. The goal of the financial sector is not simply to make a profit, but also to direct capital toward developing industry for the purpose of international trade. Additionally, instead of using primarily foreign capital, the Japanese system relies primarily on domestic capital created through household savings. This means the individual savings of Japanese families are put towards developing the national economy in contrast to the American system where foreign money fueled consumer spending.

The Japanese system can hardly be called perfect, and has suffered its own serious downturns such as in 1989. However, the United States has suffered no more than three serious financial crises in the same period, with the current one being by far the worst. Alan Greenspan, the former head of the Federal Reserve Bank called it, " A once in a half century, probably once in a century, type of event." A financial system that is highly unregulated poses just as much of a danger to our society as a source of capital to help our economy grow. In particular, in the age of globalization, where the internet provides lightning fast communication, a deregulated financial system can too easily be misled by incorrect information and speculation.

Last week, the negative effects of speculation were clearly evidenced when short selling nearly forced several large investment banks such as Morgan Stanley into bankruptcy, despite their performance not being quite that bleak. In a deregulated system, we are more likely to see financial crises driven by greed, such as the current sub-prime mortgage crisis. They are more likely to spiral out of control as speculation forces even financially sound companies to their knees. The proponents of this system point to the vast amounts of capital it can make available for use, however, the use of that capital make a profit has negated the benefits it offered. In short, this system of finance is not one that has served our nation well: it has led to a massive accumulation of household debt, the erosion of industry, and a destructive wave of defaults that threaten the very foundation of our nation's economy.

In order to return the American economy to health, the instability of the financial system must be resolved by a degree of re-regulation by the government. When the Japanese Finance Minister, Eisuke Sakakibara predicted the current crisis in American financial markets he stated the reasons as being, "that the global capitalism we now have is inherently unstable, and... We don't have the international mechanism to really prevent a crisis or to manage them when they occur." Therefore, the U.S. government, particularly the Federal Reserve Bank, must take a leading role, akin to Japan's Ministry of Finance and the Bank of Japan, in the regulation and direction of the finance industry. It is of profound importance that the financial tools available to raise capital for the economy are regulated and establish specific rules for the trading of such equity. Primarily the dependence of the U.S. economy on large investment banks should be broken, and those companies should be strictly regulated. Additionally, that system where over-consumption is encouraged through artificially low interest rates and excess capital is put to an end. Instead a policy the encourages savings by limiting access to easy credit such as mortgages, credit cards, and other forms of commercial borrowing for consumption. With higher savings the U.S. will have a decreased need on foreign capital to both finance our debt and to provide capital for business. Increased savings will also provide a considerable bulwark of funds both nationally and within the banking system itself with which to protect against further financial crises. Although there may be little we can do to correct the current crisis and the impending economic recession, through smarter regulation and coordination between the government, banking sector, and industry we might just be able to secure a better and healthier American economy for generations to come.