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Friday, Dec. 28, 2001

LACK OF DEMAND

Japan nears economic abyss


The story of the dimwitted man watching the rerun of a Clint Eastwood Western is relevant to current claims that the "structural reforms" urged by Prime Minister Junichiro Koizumi will somehow rescue the Japanese economy.

Clint is riding full pelt toward an abyss, but the man bets his friend that horse and rider will not go over the cliff. When both do go over the cliff, the friend says he can't take the money since he had already seen the film and knew what would happen. To which the dimwit says that he too had seen the film before.

"Then why did you make the bet" asks the friend.

"Because I figured Clint was a pretty smart guy and would not make the same mistake twice," was the reply.

In 1996, then-Prime Minister Ryutaro Hashimoto vowed to restore the economy by cutting public spending and forcing through reforms. A promising economic recovery stalled, and the economy headed for the abyss. It was only rescued at the last moment by a new administration promising to raise public spending.

Today we see a repeat of exactly the same scenario, this time with Koizumi in the saddle. The mild 1999 economic recovery has been killed, and once again Japan finds itself at the abyss. But this time the dimwits are refusing rescue operations.

How much longer do we have to wait before Tokyo begins to realize the obvious -- that Japan's key economic problem is a chronic lack of consumer demand and that cuts in spending are the exact opposite of what is needed? Even an economy as strong as Japan's cannot survive a situation where 1.4 quadrillion yen yen, or $90,000 for every man, woman and child in Japan, is stashed away in personal financial assets.

In the past Japan got around the problem of inadequate domestic demand by relying on expanded exports and inflated land prices (which boosted credit). But yen appreciation and the collapse of the bubble have put an end to all that.

Keynesian-style expansion of domestic demand through expanded government spending is now the only answer. Long-term, sensible reforms to help finance that spending as well as incentives to stimulate consumer spending are also needed.

Why do the Japanese manage so consistently to get it wrong where their economy is concerned?

A cultural propensity to fuss over details while ignoring the broader picture is one reason. Relentless media attention to each and every Koizumi privatization plan seems to have convinced not just Japan but even the outside world that somehow structural reform will indeed save Japan.

Someone should point out that even if every one of the Koizumi reforms went through, the total savings would probably be less that what Japan is currently spending on unemployment and small enterprise relief -- and far less than what will be needed to rescue the bank bankruptcies bound to follow.

In 1996 the fuss over Hashimoto's plans for administrative reform played the same distracting role. In 1992 the sensible Keynesian policies of former Prime Minister Kiichi Miyazawa were derailed by a quite spurious fuss over so-called electoral reform. Miyazawa wanted about 2 trillion yen to help the banks overcome the bubble collapse. Japan is now facing a bill close to 100 trillion yen.

True, the attention to official debt and to waste in some government spending is deserved. But someone should also point out that the lack of needed spending is a far greater economic sin than wasteful spending; that official debt is still much less than the total for excessive savings; and that debt-service costs are falling due to low interest charges.

Meanwhile, almost no one is looking seriously at the key causal factor behind Japan's economic problems, namely the reasons for those excessive savings. Those who do realize there is a demand problem see it as temporary and due to concern over, you guessed it, lack of structural reform.

Some say naively that Japan has only to realize its manufacturing prowess and it will come up with the gadgets that will stimulate demand, even as Japanese manufacturers abandon Japan to produce in China. And so on.

Bad economics is another reason why Japan gets it wrong so easily. Dogmatic Marxist theories dominated the universities for most of the postwar years. Now we see the exaggerated reaction in the form of a new generation of economists centered mainly at Keio and Hitotsubashi universities who have embraced the rightwing, laissez faire, supply-side policies of the United States/Britain in the 1980s with a gusto that leaves even their Western colleagues surprised.

That the problems facing the Japanese economy -- excessive supply/inadequate demand -- are the exact opposite of the problems that used to face most Western economies does not seem to have impinged on the immature minds of these people.

The recent white paper on the economy, written largely by the current Keio crop of economic advisers close to Koizumi, managed on the one hand to recognize there was a demand problem but then went on to ridicule "outdated Keynesian" solutions while calling for the reforms that would improve economic efficiency.

Japan's leading economic newspaper, Nihon Keizai Shimbun, noted tartly that if lack of demand was the problem then efficiencies that increased supply were hardly likely to be the answer. In the past that paper had taken the lead in ridiculing Keynesian policies. (My own longstanding relationship with that newspaper was rudely cut five years ago when I openly criticized its failure to realize that excessive savings were killing the economy.) Now it is starting to join the widely read Yomiuri newspaper in calling for some fiscal and Bank of Japan stimuli. Pressure in the ruling Liberal Democratic Party for similar policies is rising.

Already some close to Koizumi are saying he will start to do something about the economy if his policies do not produce results by next year. But by then it may be too late.

Gregory Clark, an honorary president of Tama University, is a member of the "Private Discussion Committee" set up in September by Japanese Foreign Minister Makiko Tanaka to discuss international affairs.


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