By Henry Hilton

Commentary Dec. 07, 2008 - 05:53AM JST ( 7 )

Fear of the Japan model is haunting international capitalism. Open any paper and you are guaranteed to spot the statements on how serious deflation Japanese-style is stalking the G-8 economies.

Financial commentators keep piling on the Japan analogy. First, we are solemnly informed, successive governments in Japan took much too long to get to grips with the post-bubble mess. Then it was the fault of the Bank of Japan for being mighty slow to start quantitative easing before 2001.

No doubt all true. And if all this bad publicity wasn’t bad enough, it is now confirmed that today’s Japan is also back in a recession. It’s a double whammy for the nation: condemned historically for failing to clean up its toxic waste during the lost decade and now faulted again for letting its economy hit the rocks.

The result today is that no one overseas is looking to Japan for help. The days when Tokyo and Bonn were seen as the twin resuscitative engines of global growth are long over. Instead, Japanese corporations are cutting back at home and abroad by downsizing investment commitments and employment levels. Deleveraging continues, while the Aso coalition cabinet postpones its latest economic rescue package until 2009.

The headlines confirm how quickly and deeply Japan’s problems have become. Graduating students may not get the job offers they had been confidently expecting, more part-timers will replace jobs-for-lifers, the auto industry is in trouble and the Tokyo Stock Exchange is going nowhere.

Abroad, the image of Japan as the benign employer who thinks long-term and takes the welfare of shop floor and white-collar workers seriously is also in some disarray.

Nissan is introducing Friday-less production. Honda is quitting Formula One motor racing and across Asia, there are certain to be still more redundancies before Nomura finally completes the cullings of its brokerage staff.

Those who hoped against hope that the present global tsunami would just be another blip that comes with the business cycle look like getting it completely wrong. The depth and seriousness of the contemporary crisis
is hardly in doubt by now, though governments and their advisers are still trying to work out what has hit them.

Given the credit crunch and the inevitable impact that has been taking on property prices and employment, the ideal aim must surely be to get banks lending, companies investing and consumers buying. It is doubtful
though if the world economy will be able to pull itself out of crisis before mid-2010.

In the meantime, electorates will expect their politicians to keep on bailing out major banks and corporations, while homeowners facing repossession want reassurance that help is on the way over their mortgage payments.

It’s a funny world when central bankers quite possibly are on target for emulating the Bank of Japan’s unprecedented record during the 1990s of instituting almost zero interest rates. Yet, as with Japan then, it may well be that this monetary medicine fails to do the trick.

Once deflation gets hold, consumers, not surprisingly, see the advantage in delaying big ticket purchases as things quickly become cheaper month by month. Fear of losing one’s job and then not being able to secure a new one also acts as a powerful damper on the consumer’s appetite for taking on fresh debt. Unfortunately, those countries which then turn into serious savers in the Japanese mold are really acting against the national interest by failing to boost the overall level of economic activity.

Other countries are also going to discover that their levels of government debt will speedily approach unthinkable Japanese levels. Since the state simply has to keep bailing out a beleagured economic system by acting as the lender of last resort, there is probably no alternative to such policies. Paying back such levels of public debt ought then to be seen as a secondary problem for the day after tomorrow when the crisis has eventually been resolved.

At present, it’s decidedly cold comfort but much of what Japan went through during its lost decade looks likely to be followed by a host of countries in 2009. It’s one Japanese model though that the world could well do without.