POINT OF VIEW/ Kazuhiko Toyama: Let Japan go bankrupt to awaken people to crisis

Even after 20 long years of economic stagnation, there has yet to be a true sense of crisis among people in this country. It would be in Japan's best interest to be allowed to go bankrupt. That would make clear the problems with the nation and heighten the people's sense of crisis.

The real problems underlying the nation's economic stagnation are the political and economic systems created after the end of World War II that have outlived their usefulness. Many people understand that these outdated systems should be replaced with new ones. But middle-aged and senior citizens have vested interest in the old systems, which offer such great benefits as lifetime employment and handsome pension payouts. Changing these systems just doesn't make sense to them. That's why necessary reforms remain unachievable.

Meanwhile, there has been a growing sense of frustration and helplessness among young generations. After graduating from school, many young people find there are simply no jobs for them. That's because the only conventional way for companies to adjust their work forces during an economic downturn is to reduce the numbers of new graduates they hire. Youngsters must be feeling that they are getting the short end of the stick while older generations are protected by the old systems.

Bankruptcy is not an end. It is a first step toward building a new system. People who have suffered a heart attack or a stroke often change their lifestyle habits because they have been shocked by the disease. When a company fails, a sense of crisis prods employees into tackling the tough challenges they would otherwise avoid. Such a situation also makes it easier for the company to shed jobs. Dismissed workers feel that it can't be helped, while executives feel less reluctant to give workers the pink slip.

This should be allowed to happen on a national level.

A bankrupt government simply has no money to dole out to many people. It can only help the truly needy. People who are only in moderate trouble find it difficult to demand public aid when they see empty state coffers. It is easier to close the door on those who are only pretending to be socially vulnerable. People who have been sponging off welfare funds find they can no longer do so.

Japan is close to bankruptcy. Symbolic of the situation is the dire state of public finances. As cash income (tax revenue) has fallen sharply, the government finances its budget with massive debt by issuing bonds. The primary balance--the budget balance excluding debt-servicing costs for bond redemption and interest payments--is deeply in the red.

The financial situation of the government is similar to that of Japan Airlines Corp., which is under rehabilitation after going under. JAL was criticized for the high pension benefits it offered to retired employees. But the operations of the nation's public pension programs are still based on the assumption of high rates of returns on its assets. The current misery of JAL foreshadows the future of the nation.

The Meiji Restoration in the 19th century was initiated by people who had realized that the Tokugawa Shogunate, which lasted for about two and a half centuries, was on the brink of collapse. The question is when people really realize the seriousness of the situation.

The Satsuma and Choshu clans, which played key roles in the Meiji Restoration, had been soundly defeated by major Western colonial powers in military clashes--the bombardment of Satsuma's town of Kagoshima by a British naval fleet in 1863 and the battles for Choshu's Shimonoseki in 1863 and 1864, which involved four nations.

These defeats made the two feudal domains realize the absurdity of the anti-foreigner doctrine that was popular in xenophobic Japan at that time.

This realization prompted the two clans to switch to pursuing the path of opening Japan to the outside world while modernizing the country, although the reform meant firing all samurai warriors, who accounted for nearly 10 percent of the nation's population. In contrast, Japan was plunged into the disastrous war that ended in its devastating defeat 65 years ago as people didn't realize the recklessness of the venture until it was too late.

To push the nation into bankruptcy, the government has only to keep issuing bonds. As it keeps piling on new debt, the government will become insolvent in five years, or 10 years at the latest.

One big plus of allowing the Democratic Party of Japan to govern the nation is that the DPJ-led administration, which is naive about policymaking and political maneuvering, tries to implement policy packages that are in conflict. Trying to respond to conflicting demands at once, the DPJ-led government has no choice but to issue more new bonds.

The Liberal Democratic Party was more cunning. The party kept dragging its feet on tackling real problems while paying lip service to demands for action and change. But the LDP's approach would only make the inevitable bankruptcy even more catastrophic.

Japan will face bankruptcy earlier if the DPJ remains in power. Now, it seems that a fiscal collapse is the only way to awaken the people to the grim reality of their nation.

The main features of Japanese-style management in the postwar era, such as lifetime employment and seniority-based pay scale, have effectively shifted the part of the government's burden of providing social security to the corporate sector.

In return, the government has been protecting companies with regulations and subsidies. These practices secured stable and predictable income for corporate employees. These approaches were once praised internationally as the main sources of the vitality and competitiveness of the Japanese economy.

Things are different now, however. These practices keep costs high amid fierce international competition, thereby putting a drag on corporate management. The framework of a free-market capitalist economy under which countries engage in hard-driving competition for wealth has remained intact despite the global financial crisis triggered by the collapse of U.S. investment bank Lehman Brothers. The Japanese system to impose the burden of social security on companies has reached its limits.

It is as if Japan were alone trying to maintain pure and righteous amateurism as it competes in the Olympics while other countries are locked in bare-knuckled competition for medals. A defeat in the global economic war means wretched poverty.

The biggest reason for the widespread sense of helplessness among Japanese companies is that they have kept losing important battles to their rivals from emerging countries. Politics and the administration should at least eliminate impediments to the efforts of Japanese companies to hold their own with the formidable competitors.

The government must lower the corporate tax rates and ease the regulations on the labor market. Even the welfare-oriented Scandinavian countries have made all possible policy efforts in these directions.

Strangely, it seems in Japan, since the final days of the LDP's rule, the government has been working overtime to frustrate efforts to create new businesses, new industries or new jobs. How is it possible for the economy to regain vitality under such circumstances?

But Japanese people are amazingly flexible and pragmatic. Once the prevailing mood in society changes, people change their attitude quickly and drastically, as they did by switching from espousing the xenophobic doctrine to opening up the nation, and later from supporting militarism to embracing democracy with open arms.

A real change in the mood would trigger a drastic shift in Japan from the closed and consensus-oriented economic society to a more open and competition-oriented one.

I am optimistic about the outlook of Japan's reconstruction after its bankruptcy.

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Kazuhiko Toyama is CEO of Industrial Growth Platform Inc. and an expert in helping troubled companies turn themselves around. He assumed the current post after serving for the former Industrial Revitalization Corp. of Japan. Last year, he played a leadership role in the transport ministry's task force for bailing out Japan Airlines Corp.