Unable to fend for itself

TOKYO From The Economist print editionJapan's export-led economy still relies heavily on America

IN TOKYO'S financial markets a long-held sense of injustice is turning to rising alarm. The injustice is that the shares of Japanese companies were the first to be punished, long before other stockmarkets, when credit troubles in America broke out last summer. The alarm is partly over the effects that an American recession might have on the Japanese economy. But, equally, it is over a dysfunctional political establishment at home that is incapable of facing up to a weakening economy.
Pessimism is growing about the damage an American recession might do. Last year growth in exports to Europe and China more than offset an export slowdown to America. But the United States is still the end-market for many Japanese goods that go to China. A recent slackening of shipments of semiconductors and steel to China does not bode well.
If Japan's six-year recovery were broad-based, that would not be such a concern. Yet it has been pulled along by exports, and despite repeated predictions, household spending has failed to take off. The reason is clear: though employment has steadily increased, wages are stagnant or falling, since cash-rich companies insist on hoarding their profits—and will presumably continue to do so now that dearer oil is eating into margins.
Perhaps that hoarding is an insurance against unpredictable government. A year ago, in an attempt to crack down on predatory lending, the government all but destroyed the consumer-finance industry. Far more damaging has been a system for vetting new buildings that was hurriedly introduced last summer in reaction to architects faking data for earthquake-proofing. The housing ministry was unable to get new software up and running in time, so new-building approvals collapsed. The jaw-dropping effect has been to knock 0.6 percentage points off growth, according to Takatoshi Ito of Tokyo University, who sits on the government's advisory Council on Economic and Fiscal Policy (CEFP).
Partly as a result, the government has lowered its forecast for growth in the fiscal year to the end of March, from 2.1% to 1.3%. Some economists think Japan is already tipping into recession. But the longer-term picture is more worrying. Mr Ito argues that if Japan pursued the kind of supply-side and tax reforms that the CEFP has long proposed, the country could grow at a respectable 2% a year. Without those reforms, growth will crawl along at 1-1.4%. Hopes of sensible policy have vanished since the opposition seized control of the upper house of the Diet (parliament) last July and Yasuo Fakuda's ruling coalition appears to lack the courage for reform.
Now, the Bank of Japan (BoJ) is adding to the uncertainty. At its policy-board meeting this week, the central bank was reluctant to admit that reality was at odds with its bullish view, though it acknowledged that momentum had slowed since its last outlook in October. Insisting, once again, that monetary policy should be “forward-looking”, its governor, Toshihiko Fukui, seemed to affirm that, far from cutting rates as other central banks are doing, the BoJ still hoped to raise them from unnaturally low levels.
Mr Fukui's term ends on March 19th, and somehow Japan's warring political parties must settle on a successor. With a slowing economy, the BoJ's conduct of monetary policy is about to become intensely politicised.