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Monday, Oct. 1, 2001

Koizumi should follow in Thatcher's footsteps

Special to The Japan Times

The infamous terrorist attacks on the United States have done much to alter the global economic landscape. But they have done nothing to change the economic problems Japan needs to tackle.

Indeed the very shifts that have occurred in the global scenery demand Japan get on with the job of getting its economic house in some kind of working order in a prompt fashion.

What the shocking and tragic events of Sept. 11 have done in economic terms is to turn the dollar from the safe haven of all safe-haven currencies into a prominent risk currency. That change in status is very much reflected in the latest developments in foreign exchange markets, where downward pressure on the dollar has been significant as well as persistent.

Much as dollar overvaluation is a problem, a dollar free-fall is the last thing the global economy needs at this juncture. With the dollar no longer regarded as the safest store of wealth, there is a danger of a global shrinkage of capital. Global finance begets global production linkage. Supply chains spread across the world are able to function with their super-efficiency only to the extent that global finance is there to back it up. And the overwhelmingly predominant vehicle of global finance has been the dollar.

This is where the Japan factor comes in. Japan is the second-largest economy in the world after the United States. More significantly, it is the largest net creditor nation in the world. As such, the global economy would be so much less exposed to a synchronized downturn had Japan and the yen been in robust economic health today.

Even prior to the terrorist attacks, a body of essentially political opinion could be heard which had it that now was not the time for reforms but for growth support.

Turning the Koizumi proposition on its head, theirs is the cry of "no recovery, no reform." Yet that is an argument that shoots itself in the foot. For it is the lack of reforms to the vast array of outmoded econo-social practices that is standing in the way of recovery. Mr. Koizumi may or may not know that much economics, but at least his political instincts serve him well when he opts for the "no reform, no recovery" position. And at the end of the day, good economics constitutes good politics to a much greater degree than politicians tend to, or like to think.

A case in point is that of the Thatcherite reforms of the 1980s in the U.K. It has become increasingly something of a cliche to liken the Koizumi reforms to Thatcherism. Still, the comparison does serve its purpose.

Precisely in the way that the lack of reforms inhibits growth in Japan today, it was the paranoid fear of creating unemployment that eventually led to the paralysis of the British economy's ability to create employment in the last years of the 1970s. By contrast, the fearlessness of the Thatcher government in the face of massive unemployment eventually led to a return to growth and job creation. Thatcherism may have turned out to be right for all the wrong reasons. Yet for all its warts and faults, it was still a case of good economics begetting good politics.

For notwithstanding the sometimes 1930s-like levels of unemployment, the then Mrs. Thatcher was returned to office in two successive general elections in the 1980s. True, the Falklands was a factor. True, the opposition was in a coma. Yet the extent to which people were willing to endorse the no-pain, no-gain scenario is well worth Japanese policymakers' attention.

Indeed the most significantly remarkable thing about the Thatcherite reforms is not so much the contents of the program itself, but the way in which the British public reacted to them. What they knew had to be done, they were willing to have done to them.

Politicians who claim that the Japanese public would balk at painful reforms insult their intelligence. Theorists who claim that Thatcherism was an attack on inflation and as such, had more room to maneuver than the Koizumi reforms which have to go forward in the midst of deflation, are only partially correct. Unemployment en masse is just as painful under rampant inflation as under raging deflation. Moreover, the decline in the general level of prices in Japan is the symptom, not the disease. The disease cannot be healed by containing the symptoms.

The disease of systemic outdatedness is not an easy one to cure. All the more reason for Mr. Koizumi to stick to his principles. TINA (There Is No Alternative) may be the slogan of the obdurate, but it is a lot better than NIMCO (Not In My Constituency). The latter may be good politics in the short term, but disastrous economics in the longer term.

Noriko Hama is an economist at Mitsubishi Research Institute.

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The Japan Times

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