The troubled nineties

Japan’s failure to reform in the 1980s was to a large degree a result of the continuing effect of the ‘1955 system’, which, as Gerald Curtis has argued, meant that the Cold War had become internalized within Japanese politics.

Faced with this situation, various dissident elements within the LDP, of whom the most important was Ichiro Ozawa, decided to gamble on a realignment of the forces within Japanese politics by allying with the JSP. The result was that in June 1993 Ozawa and his supporters helped to bring down the LDP government of Kiichi Miyazawa. In the subsequent election in July the LDP failed to retain its majority and was replaced in government by a coalition of the opposition parties led by Morihiro Hosokawa, but with Ozawa as its eminence grise.

One of the main reasons for this instability was that this period of political turmoil coincided with a previously seemingly unthinkable phenomenon, namely a prolonged economic slump. Japan’s economic downturn had its roots in the exuberance of the 1980s. In 1985 the Ministry of Finance, fearing that the Plaza Accord might lead to a recession, had decided to ease controls over the money supply in order to allow firms to raise cheap loans that could be invested in increasing productivity. The problem was that this increase in liquidity went too far and sparked off a wave of speculative investments in property and share values. The result was the ‘bubble economy’ of the late 1980s, during which the value of the shares traded on the Japanese stock exchange between October 1987 and December 1989 increased by 120 per cent. This upward trend could not be sustained for ever and in 1990 the ‘bubble’ burst, leaving Japanese banks and companies with a heavy debt burden. At first it was assumed that this was merely a temporary downturn as the continuing vitality of the export-orientated companies led to an underestimation of the increasing weakness of the financial sector and the hope that Japan would move back towards growth without having to undertake any substantial reforms. Unfortunately in 1997 this hope was dashed when an increase in the consumption tax led to an abrupt fall in consumer spending and Japan sank into a stubborn recession, which even the traditional means of stimulating demand, increased public works, failed to cure.

Exacerbating Japan’s problems was the fact that its moment of greatest economic weakness in 1997 coincided with a severe downturn in the wider Asian economy. The 1980s and early 1990s had seen investment capital pour into South-East Asia in order to bankroll that region’s rapid industrialization and urban development, which, as in Taiwan and South Korea, took their inspiration from the Japanese model. However, in mid-1997 the severe current account deficit and lack of effective supervisory institutions in Thailand led to speculation against the Thai baht, forcing a 50 per cent devaluation, and the haemorrhaging of foreign capital out of the country. In what was seen as a textbook example of the perils of economic globalization, the speculators then turned on other Asian economies, wreaking havoc, particularly in Indonesia where the rupiah lost 60 per cent of its value.

For many Western observers Japan’s continuing stagnation, allied to the Asian financial crisis, demonstrated that the ‘developmental state’ did not after all represent the way of the future. Indeed, by the end of the 1990s some speculated as to whether the only solution was some sort of neo-liberal revolution of the type introduced in the 1980s by Reagan and Thatcher. The problem though, as ever, was whether there was anyone within Japanese politics who was both bold and powerful enough to contemplate an assault on the social and political consensus. In 2000 the LDP finally found a leader with the will to act — Junichiro Koizumi. From 2000 to 2006 Koizumi’s government introduced measures that sought to revitalize the Japanese economy by cutting bad debt and by allowing inefficient businesses to go under, even at the cost of unemployment running above 5 per cent. Some success was achieved, but the results struggled to live up to the rhetoric. Moreover, once Koizumi stepped down from power, political instability and doubts about Japan’s future direction quickly re-emerged.