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Monday, Jan. 26, 2009

JAPANESE PERSPECTIVES

Trimming bureaucracy would give Japan years of 'buried treasure'


Every time a new economic indicator is released by the government, it becomes even more evident that this year will be a tough one for the Japanese economy.

Take industrial output. If it keeps shrinking at this pace for another six months, manufacturing and mining production could drop to half.

Last week, the government revised its assessment of the economy from "worsening" to "worsening rapidly" — its fourth downgrade in as many months.

Given the state of the global economy, we have to realize that the recession has only just begun. With the interest rate already close to zero, there's little room for monetary policy to boost the economy. It would be inconceivable, for example, to penalize depositors by charging them negative interest rates on their savings, now that a "rainy day" has finally arrived in the form of a recession.

Because of this and the approaching general election, hopes are building for a government boost in fiscal spending to shore up the economy. It almost seems like all the countries of the world are in a competition to increase public spending.

The fiscal 2009 budget features stimulus measures that will push total expenditures to more than ¥88 trillion. The question is revenue. Tax income is expected to drop while sales of government bonds are scheduled to see their first year-on-year rise in four years to ¥33 trillion.

The government has already given up its target of achieving a balance in the primary account by 2011, and lawmakers are now debating how to insert a consumption tax hike into the ruling coalition's policy platforms.

Hopes for big government may be understandable, given the wide-ranging damage brought about by excessive trust in market forces over the past several years. Still, the need for radical cuts in wasteful public spending remains, and any effort to seize the recession as a golden opportunity to boost political and bureaucratic interests must be stopped at all costs.

This year's annual labor-management wage talks highlighted the issue of manpower cuts in the private sector. Given that national and local governments are heavily in debt, it would be natural to reduce expenditures related to the Diet and local assemblies. Several legislative groups, including one linked to former Prime Minister Junichiro Koizumi, have advocated that Japan switch to a one-chamber legislature, but such proposals should have been made much earlier.

The annual salary of a Diet member is about ¥34 million. I won't go as far as calling for abolishing the House of Councilors, but reducing the 242-member Upper House to just 100 members — the same as the United States Senate (which represents a population more than twice as large as Japan's) — would save the government about ¥4.8 billion a year.

It also would be common sense for loss-making companies to skip bonus payments. It is unreasonable for a debt-laden government to pay bonuses to members of the legislature and public servants.

Diet members get an annual bonus of about ¥6.3 million. That means the bill for paying the Upper House and the 480 members of the House of Representatives is ¥4.5 billion.

Toss in prefectural and municipal assembly members, bureaucrats, quasi-bureaucrats hired by groups that pose as private-sector entities, and ex-bureaucrats engaged in the "watari" system of rapid job-hopping to pad their retirement allowances, and you get a number so huge that there is suddenly no excuse to avoid paring expenditures.

The vast presence of public and semipublic workers produced unnecessary regulations that have lowered national productivity as a whole. As the proverb "Less is more" suggests, lawmakers and public-sector workers who debate the employment issues facing the private sector should take the lead in reducing their manpower costs.

Another concern is that the expanding fiscal deficit caused by increased public spending is exacerbating fear of the future by raising the likelihood of a consumption tax hike, reduced pension benefits and a rise in the age limit from which pension payouts start, chilling consumer sentiment for the near term.

Last year's popular phrases included "maizokin" (buried treasure), which is used to refer to the mysterious cash reserves socked away in special government accounts.

Given that the nation is facing a recession some describe as the most serious in 100 years, it would be logical for the government to tap these reserves as they will disappear once used. On the other hand, cutting wasteful government spending will create surplus funds the nation can use each year for other purposes.

Japan is saddled with public-sector debts that have been acknowledged as the largest in the world. We need to stop wasteful spending, especially in times of recession.

Teruhiko Mano is a professor at Seigakuin University Graduate School.


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