The setting for our story is just off the continent. Always a bit different from its continental neighbors, this tea-drinking, traditionalist island monarchy is known for its peculiar eccentricities. Its neighbors drive on the right; they drive on the left. They make a ceremony of tea.
We look at a time when a once-dynamic, world-leading economy is sunk into decline. To make the necessary changes would require the disruption of institutions and social practices that have lasted for generations in many cases. A deadlocked political system is turned sour and squabbling. The nation is discouraged and fed up.
A new reforming leader comes into office, different from the long line of ineffective predecessors. But the problems are deep-seated, and the leader encounters fierce opposition. Poll standings drop alarmingly. Advisers urge a change of course, a return to a more accommodating posture, at the expense of critical reforms.
What to do?
In 1980, in one declining island nation, Margaret Thatcher stayed the course and pursued a consistent, but controversial and difficult economic reform agenda. "The lady's not for turning," she said, even though her poll rating plummeted southward. Instead, the economy turned, after painful adjustments, and Thatcher won the respectful title of the Iron Lady.
Today, Japan is the island nation in decline. A decade of stagnation has neither recovered cyclically nor led to sufficient reform of its problematic institutions. Junichiro Koizumi is the reforming leader encountering opposition and plummeting poll numbers. Many predict he will have to do a U-turn. Will the gentleman be for turning, or will he become Japan's Iron Man?
Time will tell, of course. Koizumi's task might seem easier than Thatcher's, in that Japan's decline seems so recent. When Thatcher came into power, Britain was seen as having been in decline since World War II. In the opinion of some analysts, Britain started to lose the competitiveness race as early as the 1880s.
As recently as the beginning of the 1990s, in contrast, Japan was still seen as the rising dragon, and pundits lauded Japan as the exemplar of a more patient, more cooperative Asian social model, from which the West could learn lessons. Nobody had promoted Britain as a model for much of anything, although a few observers held it up as an example of managing decline gracefully.
It was the suddenness of Japan's plunge, in parception, from paragon to basket case that led to a particular shock and depression among the Japanese. At first, the economic decline seemed merely cyclic, and most Japanese expected the cycle to turn within a year or two. The economic authorities applied Keynesian economic stimulus until Japan seemed likely to sink into the ocean under the weight of all the concrete poured in government spending programs.
It was this very expectation that economic cycles and government stimulus spending would be sufficient that led Japanese leaders to believe that a more fundamental reform would be sufficient. In particular, everybody shied away from dealing with the overvalued real-estate holdings underpinning the banking system.
They ignored the fact that cyclic phenomena are not cyclic because of the operation of some mystical historical magic; they work because the pain of a recession usually act as a spur to make some overdue correction. In the case of America over the past eighteen months, the correction was in the overvalued market for high-technology stocks, and there, the correction was essentially automatic. Correcting real-estate valuations requires specific human action, and as such is harder to do -- a bad side-effect of the Japanese consensus model. Sometimes capital can be too patient, by far.
In Britain's case, its decline relative to the rest of the world failed to create the spur for reform precisely because it was relative. In absolute terms, life in Britain continued to get better throughout much of the period of decline for a majority of the voters. It was not until the endgame of the old British model that the sourness of unemployment, desperate labor strife, and the climate of despair generated a willingness to support solutions of the degree of Thatcher's.
Japan is now in a climate of despair, but despair mostly caused by the shock of the fall from its artificially high level of esteem. It did not merit the level of esteem made on the basis of a false understanding on the part of pundits; it does not merit the level of despair caused by the shock of the fall.
What Japan does need is the courage to admit that Keynesian stimulus and the passage of time will not solve it problems. It needs a leader willing to coax the Japanese voters through the pain of reform, a tough coach who will sweat them but encourage and hearten them at the same time.
Thatcher earned her place in history for reforming this feat for Britain, and brought it back from a long-term and damaging decline. For this feat, she earned the title of Iron Lady. Junichiro Koizumi has the opportunity to push for reform from a position of decline not nearly as precipitate as Britain's in 1979. For that very reason, his task may be harder. If he cannot convince the Japanese institutions to bear the pain of reform, he will ultimately be replaced by another who will, but perhaps not until things become much, much worse.
However, if he succeeds, he may well earn the title of Japan's Iron Man.
