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Obuchi Economic Therapy Better Than Previous Cures

TOKYO -- Japanese Prime Minister Keizo Obuchi is recasting his economic agenda this spring in ways that might just help return this recession-wracked nation to sustainable growth. Obuchi, who already has lessened his focus on spending packages designed to prop up hopelessly inefficient industries, has instructed his government to prepare by June 11 an action plan intended to boost industrial competitiveness and cope with Japan's rising unemployment.

"Risutora," or restructuring, has finally become a buzz word in Japanese boardrooms. Under intense pressure to improve their bottom lines, companies here are beginning to significantly shrink their work forces. Sony (SNE), NEC (NIPNF), Toshiba (TOSBF), Hitachi (HIT) and a raft of other blue-chip firms have announced they will cut their staffing -- in some cases by as much as 10% -- over the coming years. Most of these cutbacks will come in the form of hiring freezes and early retirement packages for workers in their late 50s and early 60s. Middle-aged employees with "bubble-economy" mortgages and families to feed will keep their jobs for now, albeit at reduced salaries.

Japan's lifetime employment system is fraying at the edges. Unemployment in the world's second-largest economy has already reached a record 4.8% (3.4 million people), higher than in the U.S. Given the "risutora" fever sweeping corporate Japan, that number will almost certainly punch through the psychologically important level of 5% before year's end.

Obuchi realizes that while these cuts may help to improve corporate profitability over time, they threaten to hinder growth prospects in the short run by damping consumer spending, which accounts for roughly two-thirds of Japan's GDP. Fearing the worst, Japanese people have been cutting back in a big way. Last month, for example, retail sales fell 1.8%.

Worried that if he doesn't change the situation soon he too will be joining ranks of the unemployed, Obuchi is adopting a new approach to managing the economy. He will, of course, continue to throw wasteful pork-barrel money at bloated industries such as construction, which employs about one in 10 Japanese with a job and provides crucial backing to Obuchi's Liberal Democratic Party. If Obuchi doesn't keep these industries on life support, he'll undermine the LDP's most important voter base and he won't stand a chance of achieving his 0.5% growth target for this fiscal year.

Obuchi now seems to recognize, however, that unless he implements policies that encourage restructuring, there's little hope Japan can regain its competitive edge in the global economy. Suggesting that you can teach an old dog new tricks, the Financial Times reported this week that Obuchi has "read and re-read" a White House-sponsored report put together during the Reagan years that outlined a strategy for bolstering competitiveness in the U.S.

Some of Obuchi's competitiveness proposals look strikingly similar to what the U.S. did years ago: deregulation to encourage venture businesses, implementation of a 401(k)-like pension system and government support for growth industries in areas like biotech and telecom.

Expanding the safety net for the unemployed is the other key element in Obuchi's new policy approach. Until recently, the government worked feverishly to discourage firings and actually has a massive subsidies program in place to accomplish this. Under the program, the state forks over gobs of taxpayer money to companies to keep in jobs nearly four million employees who otherwise would be out on the street.

While this "employment adjustment subsidy" will likely survive, Obuchi wants to put greater emphasis on job retraining programs and expand unemployment benefits.

To be sure, this won't be cheap and will drive the nation further into debt. But without a wider safety net in place, companies will be less likely to fire their employees and consumers will be even more fearful of the future.

It's important to avoid getting swept up in the rhetoric, though. We've seen the smoke and mirrors before. Remember the Maekawa Report of 1986, which included a much-touted initiative to revamp this economy through deregulation. Back then, roughly 10,050 national regulations clogged business activity. More than a decade later, that number has actually risen to a discouraging 11,150.

Obuchi has electoral considerations that compel him to keep his foot off the reform accelerator. By October 2000, he must hold an election in the powerful lower house of the Japanese parliament. Right now the economy seems to be bouncing along the bottom. Fearing another downturn next year, he may move to a snap poll this fall. In the meantime, you can be sure Obuchi will continue priming the pump with more stimulus spending and trying to stem unemployment through traditional means. That'll slow restructuring, but it will also ensure his buddies in the construction industry stay in the money.

While Obuchi's evolving therapy for Japan's addled economy may look schizophrenic, at least the prospects for a faster pace of muddling through are improving. That's not saying much, but it's better than nothing and more than previous prime ministers have attempted.

John F. Neuffer, a longtime observer of Japanese politics, is an analyst at Mitsui Marine Research Institute (MMR). He writes occasional commentary for TheStreet.com. Neuffer publishes an in-depth roundup of Japanese politics at his Web site, behindthescreen.com. The views expressed above are those of Neuffer and not necessarily those of MMR. This column is exclusive to TheStreet.com.

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