Why to Be Bullish on Japan.(Brief Article)(Interview)

Six months ago Heizo Takenaka abandoned academia to help rebuild Japan's basket-case economy. As minister for Economic and Fiscal Policy, he's the chief strategist behind Prime Minister Junichiro Koizumi's sweeping reform agenda, which draws its inspiration from Margaret Thatcher's efforts to revitalize the British economy in the 1980s. A harsh critic of past Japanese administrations, he has recently adopted a new role: the optimist. Today he argues that, despite the Sept. 11 terrorist attacks and a looming global recession, Japan is healthy enough to implement Koizumi's supply-side policies. He forecasts a painful two- to three-year transition, followed by a broad- based recovery. He spoke recently with NEWSWEEK's George Wehrfritz in Tokyo. Excerpts:

WEHRFRITZ: Experts warn that Japan's only functioning growth engine-- exports--is sputtering after the Sept. 11 attacks. Consumer confidence remains weak and the government has pledged to slash pork-barrel spending. Where will growth come from?

TAKENAKA: Consider the supply side. Once it is strengthened it will create additional wealth. In the very short run demand is important. But in the medium term the supply side is much more important. Take cellular-phone deregulation in Japan. Before the mid-1990s cell phones were distributed on a rental basis. Then we deregulated so cell phones could be bought and sold, and very suddenly new demand appeared. To meet it, NTT and other companies increased investment. This is an example of how supply-side strengthening can suddenly create demand. I expect similar effects elsewhere in the IT field. In the United States and England, it took 10 years for such supply-side policies to become completely visible. We should be patient.

You said recently that Japanese stock prices would triple over the next 10 years. Do you really believe that?

I believe that. Consider the case of Sweden, which suffered seriously from nonperforming loans and big government in the early 1990s. If I'm not mistaken, their stock prices rose 4.6 times over the last decade. In the United States they rose 4.2 times. I'm very confident that Japanese stocks are undervalued. Cabinet ministers are prohibited from trading stocks, of course. But if I had money and the freedom to trade, I definitely would buy.

A year ago you said that Japan's financial crisis was over. But stock values have dropped 30 ...