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Hope for Japan's Henjin.

When will Japan surpass the United States in financial power? That question was bandied about a little more than ten years ago when Mitsubishi Estate Co. purchased Rockefeller Center and other Japanese investors snapped up Pebble Beach, Columbia Pictures, and other American crown jewels. In the late 1980s, Japan--and its successful mix of capitalism and socialism--was regarded by many as a successor to the U.S. as global economic leader.

Today the question should be: If the Japanese economy continues its downward spiral, when will Turkey surpass Japan in power?

Never, if Japan's locally known "Henjin," or wildly popular and eccentric Prime Minister Junichiro Koizumi, manages to recharge his nation's economy and break up its system of political patronage. After all, Japan is the world's third largest economy, and an important engine behind world markets. It is an anchor of political stability in Asia. Japanese industrial quality is recognized the world over.

But the country fails to live up to its potential. When explaining their problems, the Japanese like to compare Japan to Italy. The political process needs to be cleaned up, just as it was in Italy, locals offer.

Actually, Turkey makes a better comparison. Consider key characteristics of Japan. It is an ancient Eastern culture, and former military powerhouse. It adopted Western economic and political ideas under foreign pressure. Financially troubled banks and a sclerotic political system have halted its growth.

At first glance, Turkey and Japan couldn't be more different. Japan's per capita GDP nears $26,000; Turkey's is $6,300. Japan swamps the world in manufactured goods, exporting some $455 billion worth yearly--20 times more than Turkey. With a savings rate of about 30 percent, Japan is the world's largest supplier of capital. Turkey is a chronic borrower.

However, both countries were warrior nations that made peace with the West and embraced democracy relatively late. Modern Turkey dates from 1923, when soldier-turned-political reformer Ataturk established the present republic. Japan's current economic and political systems date back to its defeat in World War II when the U.S. forced it to change its ways.

Like the Turkish, the Japanese have seen their banking sector weaken dramatically. Based on official estimates, Japan's banks hold some $340 billion in non-performing loans. Turkey's three state-owned banks have less bad debt in absolute terms, at around $20 billion. But relative to the size of their economies, the problem is similar--bad debt totals at least 10 percent of each country's GDP.

In both Japan and Turkey, bad debt is a symptom, not the cause, of economic woes. Prolonged stagnation in Japan and a financial crisis in Turkey are a direct result of the problems in the two countries' political establishments.

Ruled by the Liberal Democratic Party since 1955, Japan boasts a stable political system. Turkey's recent history is more turbulent. Its armed forces intervened in the political process most recently in 1980. But in both countries, inertia prevents reform and generates abuses that are at the root of their economic crises.

In Japan, one source of trouble is that 21 percent of the population lives in rural areas and the country's peculiar electoral system gives disproportionate voting power to this population. Japanese rural voters are less receptive to change, and as a result, politicians tend to move excruciatingly slowly--too slowly to solve problems.

The good news: Under Koizumi who was elected in April, the Liberal Democratic Party has promised to reform itself. After a decade of futile grappling with economic problems, there is some hope that the Japanese political establishment has realized that the root cause of economic weakness is inertia, and will commit to real change.

To gauge Japan's progress, corporate leaders should watch for signs that Koizumi is taking on the dinosaurs within his own LDP party, which has so far shielded inefficient sectors from painful reforms. If Koizumi makes progress in cleaning up the banking system without losing his effectiveness as a leader, there's hope for Japan. But until true political change--as opposed to reform rhetoric--takes hold, the economy will remain stagnant.

Stephan Richter (srichter@theglobalist.com) publisher of TheGlobalist.com.
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Title Annotation:Prime Minister Junichiro Koizumi's promises of reform
Author:RICHTER, STEPHAN
Publication:Chief Executive (U.S.)
Article Type:Brief Article
Geographic Code:9JAPA
Date:Oct 1, 2001
Words:682
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