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Prime Minister Shinzo Abe was the first foreign head of state to meet with President Donald Trump after his remarkable election victory. Looking back at the footage television photographers shot at the time, one sees him emerging from the meeting with a beaming face. This may seem odd, considering that the US President during the campaign had cited Japan specifically (along with China) as a country enjoying unfair trade advantages vis-à-vis the United States, one with which relations would have to be corrected. As recently as last month he complained that China and Japan “play the devaluation market, and we sit there like a bunch of dummies.” It would be more than a bit surprising if Mr. Trump had not raised this issue during the talk with Mr. Abe. The notion certainly rattled many Japanese business leaders amid (highly premature) talk that a trade war may be brewing.

Actually, Japan had been running foreign trade deficits for several years until it produced a surplus in 2016. But that black entry, of USD 36 billion overall, was based on a bilateral surplus with the US of USD 60 billion. As for the charges of currency manipulation, the yen has been taking a dive against the greenback, but this has had more to do with the Bank of Japan’s super-easy monetary policy than with a targeted effort to lower the exchange rate in order to make exports more competitive. Of course, one finds it hard to argue that lowering the dollar value of the yen has not been at least a secondary objective of Nippon’s money managers. And the BoJ is clearly determined to keep monetary policy loose. It will not raise short-term interest rates out of negative territory anytime soon, is likely to keep the cap on ten-year bond yields at roughly zero, and will continue its purchases of government bonds at a pace of YPY 80 trillion annually.

These policies have helped to sustain at least meager economic growth, which the BoJ estimates at 1.4% for the financial year ending in March and predicts at 1.5% for the next 12 months. But monetary stimulus alone cannot propel the country to a solid recovery. On present trends, wages will continue to stagnate although the labor market is tight, with the official unemployment rate at 3.0% and the ratio of job openings to applicants at 1.43. Consumption and investment will stay weak. For a sustained run of better results the nation’s labor laws would have to be made more flexible, retail laws & regulations would have to be changed to allow more competition and encourage investment in more efficient distribution, agriculture needs land reforms, and ways have to be found to lower trade barriers to help break up domestic cartels.

Above all, the government would need to stop propping up many of the zombie companies that have been insolvent and have generated losses for years, able to keep going only with the help of easy financing terms. The problem, at least in part, dates back to the global economic crisis toward the end of the last decade, when then-Financial Services Minister Shizuka Kamei pushed through a law forcing banks and other financial institutions to be as flexible as possible in their responses to pleas from small businesses that their loans be rescheduled. The law has expired, but the government to this day has been pressing banks to continue with the policy. The upside is that the number of bankruptcies has declined for seven straight years, to 8,164 in 2016 from over 13,000 in 2009. In addition, 25,000 businesses shut their doors voluntarily last year, but if the nonviable enterprises were counted that are hanging on by their fingernails, total bankruptcies might have been up to 35,000 (according to Teikoku Databank).

The downside is that the zombie companies not only fail to repay loan principal and often also interest, but two-thirds of Japan’s companies do not make enough profit to pay taxes. By keeping non-viable enterprises afloat the government has been badly skewing resource allocation and has helped to limit access to finance by viable companies. It has been encouraging excess production that leads to downward pressures on prices, which, in turn, persuades consumers and businesses to hold off with purchases on the expectation that they will get a cheaper deal later on. The government will not end its push for an easy-loan policy anytime soon. After all, about 70% of all Japanese workers are employed by small firms, including the troubled ones. As for the Bank of Japan and its slack monetary reins, it remains more worried about deflation than about inflation. And while it has run up an enormous balance sheet since the global financial crisis, the government, looking at a debt load that at 250% of GDP is the heaviest of any major economy, has a monopoly on printing money. So it and the Central Bank cannot go belly-up in the sense that private entities can. Still, from a credit-management point of view it would seem to be a good idea, when dealing with smaller companies, to look beyond the financials that are being offered and try to gauge the underlying strength of a business.

Global Perspectives by Dr. Hans Belcsak