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Saturday, Jan. 12, 2002

Japan's economic black hole


Realism is finally impinging on the economic debate here. The "structural reform" ideologues may remain blind to the contradiction between urging privatization and liberalization even as they are being forced effectively to nationalize a banking system suffering from past liberalization excesses. But they do at least realize something has gone wrong with the economy, and are beginning to focus in on low consumer demand as a key problem.

But why the lack of demand? And what can be done about it?

Obviously people cut back on spending in hard times. But even in good times the Japanese save an abnormally high share of disposable income. In the past, firms, speculators and the government borrowed and used these savings. Demand remained healthy. But today both firms and government are cutting back, partly due to structural reforms. The speculators are on the sidelines. Funds are not circulating. The economy stagnates.

The 1,400 trillion yen in personal financial assets held by Japan's inveterate savers has become an economic black hole, sucking badly needed demand from this once strong economy.

Conventional wisdom says the Japanese save because they have to worry about the future. But this is largely rationalization. Consumers in other advanced nations have the same worries, or more. But as anyone visiting the West -- the United States, Britain and Australia especially -- can see, people are spending their hearts out, and keeping their economies healthy in the process.

True, Japan's reputation for longevity, or what politician Koichi Kato calls the "Gin-san/Kin-san phenomenon" (in reference to the two boisterous sisters who were still delighting TV audiences well after their 100th birthdays), could be a cause. But the fact that the average Japanese lives three or four years longer than the average American cannot alone explain why the savings rate is more than 12 percent in Japan and almost zero in the U.S.

The skewed wage and retirement bonus system, with people receiving more than they need as they get older, and not enough when they are young, is another factor; the bulk of that enormous 1,400 trillion yen is held by people over 60. Adding to the savings pool has been the massive transfer of wealth to people, many elderly, who sold land or shares during the bubble years and who had little use for their windfall gains.

But the main factor, surely, is the Japanese lifestyle. Conformism and a lingering Confucianism discourage ostentatiously luxurious living. A traditional liking for austerity and simplicity still has some sway. The social system works against long family vacations -- a major cause of spending in most Western societies.

The status factor is equally important. Most Japanese see status mainly in their workplace, and will spend heavily on the education needed for prestige employment. They will also spend generously on "kankonsosai" -- the rituals and entertaining needed to maintain one's place in society. But that is about all. In most other societies the status symbols are more material, more expensive and the spending much more continuous.

What to do? Blaming entrepreneurs for not producing the goods and services that consumers might want is meaningless. Entrepreneurs, like consumers, come with the territory. If they lack imagination and verve then that is something Japan has to live with. Besides, even U.S. entrepreneurs would lose verve if faced by Japan's sluggish consumers.

Removing the many restrictions that kill verve would make more sense. But promised action is slow; the administration is too preoccupied with details of its various privatization and bank-rescue plans. Incredibly, Tokyo has still to get round to abolishing a punitive bubble era tax on the land purchases needed for large-scale developments.

If consumers, entrepreneurs and speculators won't move, and if the yen won't depreciate enough to spark large foreign and import replacement demand, then it should be obvious that there is only one other player left on the field, namely the government. The standard complaint that government spending has so far failed to revive the economy is on par with the heart victim who complains that his wheelchair has failed to cure his disease.

The spending on public and other works was never more than enough to fill only part of the demand and employment gap. But without it the economy would be in even greater trouble, as we discover each time yet another reform-minded administration sets out to cut spending.

Many are worried about excessive borrowing to finance the spending. But given the size of the demand gap, a high level of borrowing is inevitable. The real problem is spending borrowed money for projects with little or no economic return. Here Japan should rely more on tax revenues once the economy has been kick-started. It could also do something to get rid of waste and corruption in the way funds are spent.

The share of Japan's GNP taken in taxes is still quite small by the standards of other advanced nations. Low and even moderate income earners are taxed much less than in most Western nations. Evasions and loopholes allow many smaller companies to avoid paying any taxes at all. Replacing the unpopular consumption tax with higher taxes on a wide range of goods and services at source would increase indirect tax revenue and might even encourage consumption.

In effect, Japan would tell itself that if its consumers do not want to spend money on the vacations, large houses, cars and other status symbols that we non-Japanese regard as so important to our standard of living, then the government will step in and provide the parks, clean air, schools, hospitals, transport links and so on that also contribute to a better, some might say much better, standard of living.

But whether by borrowing or taxing, the aim should be to get excessive savings out of the piggy banks and back into the economy.

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


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