For weeks, Japanese Prime Minister Junichiro Koizumi insisted that he would name a "dedicated inflation fighter" to head the Bank of Japan. Instead, he has chosen a man steeped in the BOJ's conservative ways. Mr. Koizumi's timidity is not personal but, says Deepak Lal, reflects the stifling irresponsibility of Japan's political structures.
From a purely economic point of view, pulling Japan out of its long slump would be simple. Officials would liquidate the low-return investments that form the legacy of the late-1980s asset-price bubble and then clear away the wreckage left behind in the financial system. As the examples of the recent Korean and Thai financial crises show, what is needed is political will that is equal to the task.
But the write-offs in Korea and Thailand, while large, were nowhere near as massive as what is necessary in Japan. At a dinner in 1999, Paul Volcker, the former US Federal Reserve Bank Chairman, estimated the size of this financial housecleaning to be over 100% of Japan's annual GDP. It is a brave politician who can propose that a year's economic output be lost! No surprise, then, that Japanese leaders skirt the problem as if avoiding a mud puddle.
That path of evasion is reinforced by the nature of the political system created after the 19 th century Meiji restoration and that, notwithstanding the post-war constitution, has survived to our day. Unlike China, which for centuries had a unified, bureaucratic-authoritarian, imperial state, Japan evolved a unique form of dual and at times triple government. The Taika reforms of 604 AD created a constitutional monarchy in all but name, with political power wielded by shoguns, prime ministers, or chief advisors backed by military power. This led to a long, unbroken line of sacred and inviolable--but politically neutered--emperors that still provides the focus for Japanese nationalism.