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Tuesday, May 27, 2003

Recovery debate overlooks sensible economic policies


Is there something in the Japanese mind that prevents sensible economic debate?

Japan's semi-public National Broadcasting Corporation (NHK) recently gave more than three hours of prime time for a round-table discussion on how to save the economy. Predictably, much of the talking revolved around Prime Minister Junichiro Koizumi's claim that "structural reform" is the key to recovery. As to why this "reform" has managed in two years to drag the economy even further into decline and force an almost 50 percent fall in the stock market, all we got from the pro-Koizumi faction was the usual litany of excuses -- unpredictable foreign events, the need for more time, the economy was in fact going up even if it seemed to be going down, etc.

Even those desperately worried about the current deflationary spiral seemed unable to get their arguments right. They felt obliged to endorse structural reform; it is now a "motherhood" issue in Japan. At the same time they were saying they wanted the government to spend more money to pull the economy out of the spiral. But a key element of so-called structural reform is cutting government spending, not increasing it.

Nor did they point out how the other reform elements -- privatization, liberalization and so on -- are only relevant to the economy to the extent they encourage new investment and employment. Since most discourage new investment and cut employment, in the short to medium term at least, then they are a net negative, even if they do cut some corruption and waste.

As for that other motherhood issue -- forcing banks to dispose of bad loans -- no one mentioned the contradiction in demanding that the same banks lend more money to firms in trouble, let alone the fact that the bad loans are a result, not a cause, of Japan's current troubles. Getting rid of the loans will simply add to the troubles.

It was left to a non-Japanese, Richard Koo, to point out the real problem facing the economy, namely the lack of demand now that the corporate sector, far from borrowing household savings to expand production as it did in the past so well, is busy paying back past borrowings at the rate of 20 trillion yen a year. Add that to the household sector's surplus savings and we have a demand gap that for the time being at least can only be filled by rapidly expanded government spending.

But all this seemed way above the heads of the Japanese participants. Instead we had the usual calls for everyone to "ganbaru" (do one's best). I shudder every time I hear that word, with its implications that sheer will power and effort, rather than sensible thought and strategy, will be enough to overcome problems. It recalls Japan's blind, futile efforts as it rushed to disaster in the final years of the Pacific War.

Just 13 years ago Japan made another rush to disaster, this time to the bubble economy. Then too, the NHK round-table "experts" took for granted the conventional wisdom that said Japan was a small island desperately short of land, and the upward spiral in land prices would continue to ever. At that time the conclusion was the fatalistic "shikata ga nai" (it can't be helped) syndrome -- the flip side to the ganbaru fixation since it too denies the role of intelligent thinking, saying in effect that nothing can be done since the problems are out of control.

Yet then, as now, there were solutions to the problems. Then, it was simply a matter of sensible interest-rate and tax policies to discourage land speculation; Japan has plenty of land, as some of us were saying even then. With the economy today, it is simply a matter of sensible policies to cope with the chronic lack of domestic demand, as some of us have been saying for several decades. But in the NHK "talkfests" there is still little voice for those who challenge the conventional wisdom.

On another recent NHK program, an advocate of public-works spending to stimulate the economy was shouted down by the conventional wisdom that says such works are wasteful. Instead, it was claimed, there should be more spending on welfare.

No one seemed to notice that welfare spending, like much other spending in any economy, is far more "wasteful" than public works, in that it does absolutely nothing to add to economic efficiency. But in purely economic terms, at least, none of this matters greatly if enough of the spending ends up creating fresh demands in other areas of the economy. The economic cycle is complete.

It is the failure to complete that cycle that is Japan's problem.

As to why the cycle is weak, one has only to look at the massive level of personal savings -- 1,400 trillion yen or $90,000 for every man, woman and child in Japan -- for an answer. Fortunately, Tokyo has borrowed some 700 trillion yen of that money for spending to stimulate demand, though the pro-Koizumi faction insists this high level of official debt is intolerable. But considering today's very low interest rates, the government could safely be borrowing and spending even more, at least in the short term. Then, as the economy recovers, Tokyo should rely much more on tax revenues to finance future spending. Scope for closing tax loopholes in Japan is large.

The alternative is for the Bank of Japan to declare that much of that 1,400 trillion yen of financial assets is dead money, and that the BOJ can safely print and circulate new money to replace it. But that kind of wisdom is unlikely under current BOJ conservative leadership.

Indeed, some, such as Richard Werner of Sophia University, claim the BOJ leadership seeks deliberately to delay recovery. It wants an economic Armageddon, to purge this economy and society of its past sins. In which case, we really are in trouble.

Gregory Clark is honorary president of Tama University. A Japanese translation of this article will appear on his Web site, gregoryclark.net.


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