MW-86 -- Germany and Japan -- Two of a Kind?

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J@pan Inc Magazine Presents:
M O N E Y W A T C H
Weekly Financial Commentary from Tokyo
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Issue No. 86
Wednesday, July 28, 2004
Tokyo

CONTENTS
@@ VIEWPOINT: Germany and Japan -- Two of a Kind?

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@@ VIEWPOINT: Germany and Japan -- Two of a Kind?

Germany was the economic leader in Europe a decade ago, as it had become
the gateway to the newly freed countries of Eastern Europe. But today's
Germany has an aging population, budget deficits, interest rates set too
high because of the constraints of the Euro, very rigid labor laws and
a dysfunctional banking system, part of which has historically been
subsidized by the government. Does this not sound familiar to the
ailments that have afflicted Japan in the last 10 years?

The problems in Germany now appear as intractable as Japan's looked
about two or three years ago. Commentators around the globe have
suggested that the challenges Japan has faced in the past few years
and continues to face are peculiar to Japan.

Perhaps not.

Japan struggled with competition from China and other Southeast Asian
countries just as Germany's Mittlestand are now struggling with the
competition from a more flexible and cheaper workforce in the eastern
European countries. Employment rules are slowly being relaxed -- by the
employees, not the politicians -- in order to compete with other more
flexible countries in Europe. Yet this is putting more pressure on the
working population, which has to support overly generous pension payments
to an aging population with a significantly longer life expectancy than
was originally budgeted for.

Germany's financial system looks as problematic as Japan's. It has been
skewed historically by government guarantees for the Landesbanks (just
as the Post Office is guaranteed in Japan). Thankfully, this has been
ruled illegal by the European court and will be stopped soon.

Unfortunately, however, Germany is constrained in a couple of areas
where Japan has had infinite flexibility: interest rates and budget
deficits.

Due to the Stability and Growth Pact, Germany is legally bound to
maintain its budget deficit at less than 3 percent of GDP, and is
unable to influence interest rates which are set by the ECB. Without
the flexibility to set appropriate interest rates and run budget
deficits, who knows how deep an economic hole Japan may have ended
up in?

What do these observations tell us about the future of Japan? It's
possible that another economic powerhouse may be falling into the trap
that Japan has been struggling to escape for the last 10 years. In
particular, the hubris of politicians claiming to "protect" their
citizens by creating inflexible labor laws, and the politicians'
desire to control, direct and protect their banking systems has
ultimately inflicted economic pain on their fellow citizens.

Germany has further exacerbated this situation by signing up for a
great political experiment: the Euro.

Japan is a serious competitor in all industries that are not protected
by Japanese politicians. But in industries where there is no
competition -- insurance and banking, in particular -- Japan is
seriously lacking.

Leading banks from all over the world are perennially profitable (think
of HSBC, Citibank, RBoS, Santander and Deutsche Bank). Yet the
biggest bank (measured by assets) in the world will be in Japan.
This has been caused by politicians ensuring that the Post Office
continues to skew the lending market in Japan.

We can see the damage that politicians can do, not just in Japan but
also in Germany, with the intent to protect their citizens. But
only free competition can be fair to all citizens equally.

For that reason alone I hope that if Koizumi can achieve only one
more piece of legislation in his remaining time, it will be the
privatization of the Post Office.

-- John Charles-Decourcy

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STAFF
Written by John Charles-Decourcy (jcd@japaninc.com)

Edited by J@pan Inc staff (editors@japaninc.com)

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