Japan has ideas, lacks leadership to bounce back

By Tomasz Janowski

TOKYO | Wed Jun 22, 2011 12:46pm BST


(Reuters) - Opening up to foreign goods and workers, deregulation, power sector overhaul, fiscal reforms and family-friendly policies is what Japan needs to emerge stronger from the March 11 earthquake and tsunami, executives, investors and economists say.

The nation's biggest crisis since World War Two has been touted as an opportunity to snap Japan out of two decades of economic stagnation and policy drift symbolized by its ceding the rank as the world's No. 2 economy to booming China.

But while the participants of the Reuters Rebuilding Japan Summit were not short of ideas, there is a sense of quiet exasperation at the politicians' failure to seize the moment.

More than three months after the disaster struck, the ruling Democratic party and the opposition are stuck in a Catch 22 logjam, with the opposition blocking passage of bills to force Prime Minister Naoto Kan out and Kan himself bent on staying long enough to get those bills through.

"In my view, the crisis has accentuated both the fundamental strength of Japan's companies, and the critical weakness of its government," said Kenneth Siegel, managing partner at Morrison Foerster Japan.

"On balance, I think the companies will overcome, but the government will be a drag on them and will undermine confidence in the economy in unfortunate ways."

Takeshi Niinami, president and CEO of convenience store chain Lawson (2651.T) operating outside the traditional big industry-bureaucracy nexus is one of the most vocal proponents of sweeping change.

"Japan should open itself. (The government) needs to explain to the public how important it is for Japan to open itself," he told Reuters reporters.

Niinami said that meant bringing in immigrants, capital and ideas and signing free trade agreements with Japan's trade partners in Southeast Asia and in the Pacific rim championed by Kan before the disaster but now on a back burner.

Deregulation and reforms of the farming and health sectors were other areas that had to be addressed.

The Japanese economy, in and out of deflation and recessions over the past decade, plunged into its second recession in three years after the disaster, shrinking 0.9 percent in the first three months of the year. It is expected to contract again this quarter and then start growing again and expand at a nearly 3 percent clip in the fiscal year starting in April 2012. But it is doubtful it can maintain that sort of pace for much longer.

A poll of more than 10,000 readers by the Reuters Japanese website showed that a third saw the economy returning to and surpassing pre-crisis activity levels within the next four years, while more than 40 percent thought it would take five years or more. More than a quarter believed it will struggle to ever match pre-disaster level.

With little in the way of domestic drivers of growth, Japan needs to adjust its policies so that it can "import" buoyant growth elsewhere in Asia, says Tomoya Masanao, head of portfolio management at PIMCO's Japan unit.

Policymakers should tackle regulatory issues and social security and revive free trade talks right after the government has secured funding for the rebuilding of the devastated areas and compensated those affected by the crisis at the tsunami-crippled Fukushima nuclear plant.

The crisis caused by the worst nuclear accident since Chernobyl is both a challenge and an opportunity.

Concerns about safety of nuclear energy, which has been developed as a reliable and affordable alternative to thermal power relying on imported fossil fuels may contribute to further hollowing out of Japanese manufacturing, prompting more companies to shift production abroad.

But it also offers Japan a chance to establish itself as a global leader in renewable energy and bring more competition to the sector dominated by regional monopolies such as Tokyo Electric Power, the operator of the Fukushima complex.

"There are many regulations that just exist for the sake of vested interests, especially in the power industry. Let's seize this opportunity and scale them back," said Taro Kono, lawmaker From Liberal Democratic Party and an advocate of a shift away from nuclear power.

However, there's widespread pessimism about political momentum for radical change and economists discussing Japan's prospects were united in predicting that a jolt from reconstruction spending later this year and next will be followed by years of sub-par performance.

"It is a hope that policymakers are going to be much better coordinated and they are going to demonstrate their a strong leadership," PIMCO's Masanao said.

"But reality might not be what we all wish to see. That suggests that Japan needs to see some form of crisis to trigger a right action or unite policymakers who have been just wasting their time every day."

(editing by Vidya Ranganathan)