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Monday, Aug. 6, 2001

Voodoo economics rule the day

Prime Minister Junichiro Koizumi's oft-repeated slogan, "There will be no economic recovery without structural reforms," sounds familiar to most Japanese.

During the recent Upper House election campaign, opposition leaders criticized Koizumi's reform plans for lacking specifics. They also charged that it was the long governing Liberal Democratic Party, now headed by Koizumi, that has delayed reforms, and that the proposed reforms would impose pain on underprivileged people.

Despite the criticisms, the LDP coasted to a landslide election victory. The Japanese Communist Party and the Social Democratic Party, the most vocal critics of the reforms, saw their Upper House strengths reduced in half.

Since the present economic slowdown started in March 1991, Japanese economists have proposed various measures as a means of boosting economic recovery.

The measures, which have changed with the times, have included economic deregulation, the creation of new industries, an information-technology revolution, moderate inflation and, most recently, structural reforms.

The economists' proposals lacked specifics, as did Koizumi's reform plans. And like Koizumi, they failed to provide logical explanations for their proposals.

I believe that Japanese economists today are beset by anti-intellectualism. Dubious theories, logically and empirically, are rampant. Economists in the academic world toy with equations, while those in the business world announce optimistic forecasts without giving logical explanations. People seeking assurances welcome groundless optimism.

Structural reforms that the Koizumi Cabinet seeks to implement will consist mostly of fiscal reform as well as expedited write-offs of bad loans held by banks.

Koizumi has vowed to limit new issues of government bonds to less than 30 trillion yen, privatize the postal services, integrate tax revenue earmarked for road construction into the general account of the government budget, and overhaul the central government system of providing tax grants to local autonomies.

He has also pledged to consolidate or privatize government-backed corporations such as Japan National Oil Corp. and turn national universities into independent public organizations. These reforms have long been advocated by the Finance Ministry.

It is clear that fiscal reform is badly needed. Nevertheless, fiscal reform would undoubtedly curb domestic demand in the short term. In the medium-to-long term, however, a reduced budget deficit would contribute to economic recovery by causing a fall in interest rates, which would stimulate capital spending and housing investment. Koizumi's message should actually be, "There will be no economic recovery without fiscal reform." The short-term effects of fiscal reform on the economy will be negative, and its middle-to-long term effects on domestic demand are uncertain in today's Japan, where interest rates are effectively zero.

The Japanese economy is highly regulated, murky and unfair. Strictly speaking, economic structural reform should be aimed at making it free, transparent and fair. True reform should be aimed at correcting latent distortions in the economy. Write-offs of bad loans troubling banks should not be included in economic structural reform. Fiscal and administrative reforms should also be separate from economic structural reform.

People who have blind faith in structural reform believe, without questioning the contents of reform programs, support groundless predictions that reform will inevitably lead to economic recovery. Only a year ago, the IT revolution was widely predicted to prompt economic recovery. The forecast has proved completely wrong. Economists who propagate unfounded optimism should be held accountable for their activities.

Takamitsu Sawa, a professor of economics at Kyoto University, is also the director of the university's Economic Research Institute.

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