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Thursday, March 14, 2002


A demand-starved economy

What do you do if you are Prime Minister Junichiro Koizumi and the "structural reform" policies you have been advocating with tight lips and a steely gaze are now hit by the deflation you have caused? Simple. You do an about-face and tell the world with tight lips and a steely gaze that you are now absolutely determined to fight the deflation.

It is a good example of what they call "match-pump" in Japanese. First you start the fire. Then you claim kudos for trying to douse the flames. Japan's light-headed media will probably go along with it all.

You will also continue to receive cheers from Western pundits and their Japanese acolytes eager to prove that the stock-market upturn sparked by your about-turn as well as signs of U.S. economic recovery somehow vindicate your original prodeflation policies.

What causes this shambles in economic thinking? Dominance of Reaganite/Thatcherite supply-side economic theories is one reason. Another is failure to realize how Japan's demand-starved economy differs completely from our demand-saturated Western, mainly Anglo-Saxon, economies.

Western norms say that public sector debt of 700 trillion yen, plus some many-trillion yen of bad bank loans, adds up to economic disaster. But if personal financial assets in Japan total an enormous 1.5 quadrillion yen yen, then a large public debt is inevitable. It could even be desirable at times.

As for the bad loans, what this means mainly is that surplus funds sloshing around in the economy have moved out of the hands of the naive or the stupid (mainly bankers) and into the hands of smarter Japanese (many criminally minded). Many of the funds still exist, buried in that 1.5 quadrillion yen. Get the economy back on track and much of it could well return, with a rush.

The pundits seem quite unable to focus in on that 1.5 quadrillion yen figure. It is as if an iceberg suddenly appeared in Tokyo Bay and we were all supposed to assume that a mountain of ice bobbing up and down below Rainbow Bridge was just an accident of nature.

No other economy has had to confront this kind of phenomenon. If our Western economists and pundits were serious about their profession, they would be out there examining every nook and cranny of the iceberg to find out how and why it got to be there and its implications for future economic theory. Instead, most seem to assume that its presence simply proves a lack of skill in controlling the Tokyo waterways.

Supply-side economists have become obsessed with what they see as the problem of improving the efficiencies in the working of economies. They assume the demand needed to make the economy work in the first place can be taken for granted. To switch metaphors, they are like mechanics who spend all their time tinkering with an engine to make it perform better, and forget about the need for gasoline to run the engine. And when they do discover the lack of gas, they blame that, too, on engine inefficiencies.

The U.S. economic "engine" probably has as many, if not more, inefficiencies as Japan's -- political waste and corruption, the Enron scandal, nonproductive spending on the military, the power of the mafia, etc. But the "engine" is powered by the high octane of never-ending demand from U.S. consumers. The U.S. problem in the past has been excessive octane, forcing overheating and cutbacks.

Japan's problem is the chronic lack of demand to fuel its economy. That has little to do with inefficiencies in the economy itself. It is due mainly to a value system that works against the lifestyle and class-status spending so crucial to keeping Western economies turning over. To the extent the so-called Koizumi structural reforms cut public demand, they simply add to the problem rather than help with a solution.

One proof of the confusion over Japan's economy is the way the Western financial media have equated Japan's problems with those of Argentina. The two situations could not be more different. Argentine debt is owed mainly to foreigners. Decades of belt-tightening will be needed before those Latin American spendthrifts can save enough to pay off that debt. Japanese debt is owed almost entirely to Japanese and is due to excessive saving. Belt-untightening could solve that problem overnight -- if only Koizumi, the pundits and the acolytes could be made to realize it.

For the past 30 years -- ever since the basic demands of most Japanese consumers were satisfied by the high growth boom that ended in the early 1970s -- Japan's economy has been distorted by this problem of inadequate consumer demand. In the past, it got round the problem by relying on foreign demand, in the form of export surpluses, and by the never-ending speculative boom in shares and land. Both these supports for the economy have now ended. Japan needs to find some new and more sensible way to fill the gap caused by inadequate demand.

One way is massive deregulation that encourages new consumer demands. The other is a taxation system that allows the government to provide more public goods and services of value to consumers. At the moment, unfortunately, very little thought is being devoted to either alternative.

Gregory Clark is honorary president of Tama University. He is also a former Australian diplomat (Hong Kong and Moscow), and served as policy adviser in the Department of the Prime Minister and Cabinet, Canberra, 1974-76.

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