Summary:Low economic growth, stagnant employment, nearly zero interest rates, impaired banking, a weak financial sector and solutions to all of these are some of the issues the panelists for this session discussed. The troubled Japanese economy is currently searching for the "right model," to diversify its financial system from a bank-centered to a more financial market-centered system.
About 75 percent of the businesses in Japan are classified as small- and medium-sized business enterprises (SME) and they will be the main thrust of economic development in the future. In the past, most of the SME lending was collateralized by a real estate price bubble. Since the booming trend in real estate reversed, SME′s found it more difficult to obtain funding for their businesses. The lack of access to credit coupled with fierce competition from China and large troubled companies up the supply chain left SMEs in bad shape. Though capital is cheap, most of it has been spent on survival and not on creating added value.
Though many Japanese banks increased the write-off of nonperforming loans, the rate at which additional bad loans are being added to the balance sheet is weakening banks further. Richard Katz, senior editor of The Oriental Economist Report predicted that "Japan′s banking system probably will not crash, but rather continue relentless corrosion. This is where dangers lie."
Many of the problems facing the Japanese economy can be traced to the lack of competition. Competition creates a wealth of knowledge by providing incentive structures to challenge the status quo. Many industries in Japan, including finance, are highly protected either by government or the oligopolistic structure of the market. The entry of new players and exit of failing players is not standard practice in Japan.
The lack of competition in Japanese industry is also evidenced in the rigidity of the labor market, which presents yet another challenge for Japan. The inability of labor markets to mobilize across companies, let alone industries, is a major obstacle to generating growth.
The solution to many problems facing Japan today is to increase competition. Though the concept seems simple, this could prove difficult for many Japanese who are the beneficiaries of existing protection schemes. Competition means that people, government and financial systems must accept and be ready to deal with the birth and death of companies. New firms must be able to access capital though venture or high-yield funds, and failing firms must be able to reorganize, foreclose and liquidate assets. People must be able to lose and find jobs based on their ability to perform; firms must hire and fire employees according to their merits.
Katz also predicted that reforms will take at least 10 years to occur. However, other panelists argued that steps toward solving the problem and envisioning the solutions have been well addressed by the current government.
