Japan’s ‘Walking Dead’ Problem Lives On

Nobel laureate Paul Krugman calls them “zombie ideas.” The reference here is to disproven economic theories that just never seem to die.

Japan doesn’t have a monopoly on walking-dead strategies. Over the years, though, Krugman and others have skewered Japanese leaders for refusing to bury any number of failed schemes: the effectiveness of ultralow interest rates; the dark side of a weak yen; a societal reluctance to let flatlining companies fail.

Policy-wise, Tokyo is still staggering. Since 2012, Japan has had three leaders who pledged to reanimate the economy. Each, however, fell back on the tired belief that the Bank of Japan printing more and more yen would bring the business environment back to life.

Yet now, Prime Minister Fumio Kishida seems to be falling prey to one of the worst zombie ideas: that offering government support to heavily indebted firms is the way to resurrect Asia’s second-biggest economy.

It didn’t work the first time Tokyo tried. Or the second, third, fourth or 20th time the ruling Liberal Democratic Party tried this. What, oh what, makes Kishida think this ploy suddenly succeed? Desperation, I’d argue.

Granted, with Covid-19-era life-support measures and credit programs ending, some kind of urgent backstop may be needed. And Kishida’s team is pledging to target small enterprises.

Tokyo might get the benefit of the doubt if not for two stubborn facts. One, this subgroup of companies is a core constituency of Kishida’s party, one that’s held power with only two brief interruptions since 1955. Two, haven’t we tried this before—a lot?

Trouble is, this is another example of the LDP treating the symptoms of Japan’s chronic slow-growth challenges, not the underlying causes. The real problem is lawmakers’ failure decade after decade to reduce bureaucracy, write a more dynamic tax code and level playing fields.

What the last three Japanese leaders share in common—from Shinzo Abe to Yoshihide Suga to Kishida now—is an overriding reliance on a weak yen. Since 2012, all three governments prioritized extreme BOJ easing and an ever-weaker exchange rate over reforms.

By turbocharging a decades-old scheme, these most recent governments further deadened the urgency for reinvention among Japan Inc.’s biggest powers. Among the biggest reasons it’s now backfiring: China’s powerful rise.

It was news that China had just surpassed Japan in gross domestic product terms that propelled Abe to power a second time in 2012. Abe promised to relocate Japan’s economic groove. That meant cutting red tape, loosening labor markets, raising productivity, empowering women and attracting foreign talent.

Instead, he doubled down on a weak yen, a priority that’s now getting away from Tokyo (the yen is down 25% this year alone). Abe also gave 1980s-style “trickle-down economics” yet another try.

This, of course, is the scheme that irks Krugman and ilk the most—from Tokyo to Washington. Krugman’s September 26 New York Times column carried the headline “Why Zombie Reaganomics Still Rules the G.O.P.”

No matter, Kishida is teeing up yet another attempt. “The public and private sectors need to cooperate quickly to provide aid,” Satsuki Katayama, head of the LDP’s research commission on finance and banking, told Bloomberg. The party is working up fresh support moves for firms at risk of default. They’re likely to show up on the government’s economic package to be rolled out later this month.

To her credit, Katayama understands the LDP faces a perception problem here, stressing: “We’re not planning some kind of uncontrolled attempt to keep zombie firms alive, but we need this type of effort to maintain the regions.”

Odds are, history will prove this view wrong. Unless Kishida’s party couples the latest corporate welfare boondoggle with bold steps to shake up Japan Inc., all it’s doing is rewarding complacency.

There’s a way this effort could have a happier ending than previous ones. One suggestion making the rounds is for the Regional Economy Vitalization Corporation of Japan to buy up the debt of weak companies. There’s chatter, too, about public-private-sector initiatives to provide more innovative financing options and demand more of underperforming CEOs.

Two decades-plus of Tokyo time and time again bailing out companies left Japan less innovative. At the same time, scrappy startups with great, potentially disruptive ideas are starved for venture capital financing. They also face corporate tax and regulatory systems geared toward the biggest exporters at the top of the economic food chain.

The reason Indonesia is beating much wealthier Japan in the race for “unicorn” startups is that companies in Southeast Asia’s biggest economy can grow into large ones. Japan’s playing field forces entrepreneurs to go public too early, which stymies risk-taking and disruptions.

It’s always possible that Kishida’s party will get things right this time. We all should be rooting for the LDP to finally figure out a way to support businesses against the ropes without creating a new generation of zombies. Japan’s latest idea, though, seems dead on arrival.