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Tuesday, Feb. 17, 2009

Creating demand at home must be main goal

Staff writer

To achieve a long-term solution to the economic crisis, the government must offset the sharp decline in foreign demand by strengthening industries that can generate demand at home, according to economist Nobuo Ikeda, a professor at Jobu University in Gunma Prefecture.

The Bank of Japan stands little chance of stimulating the economy, he says, because the central bank, which has been lowering interest rates to near zero, buying corporate debt and taking other measures for many years, "has run out of options to increase money supply for a short-term solution."

Gross domestic product shrank at an annual 12.7 percent pace in the October-December period, the worst performance since the oil shocks in January-March 1974, the Cabinet Office announced Monday.

In an interview with The Japan Times, Ikeda called the figure an "overreaction" and "the result of the government's lack of policy" to make the economy less dependent on foreign demand, mainly from the United States.

The result was awful, but in line with expectations as we already knew exports have dropped dramatically," Ikeda said.

Exports, which he said account for 15 percent of Japan's GDP, plunged a record 13.9 percent in the period from the previous quarter, according to the Cabinet Office statistics. Private-sector capital investments dropped 5.3 percent as money-losing manufacturers cut spending.

Exporters such as Toyota Motor Corp. and Canon Inc., which garner more than half their profits outside Japan, enjoyed bumper years until 2007 thanks to a strong U.S. economy, a weak yen and efficient production methods. Japan's total exports doubled from around ¥40 trillion in 1985 to around ¥80 trillion in 2007.

Such export-driven success kept the government complacent in its reliance on overseas demand despite the heavy criticism of Japan's huge trade surplus with the United States since the 1980s, Ikeda said.

Thus, it comes as no surprise that a drop in overseas demand for the products of auto and electronics makers would have such a devastating impact.

Earlier this month, the Finance Ministry said Japan's trade surplus shrank 34.3 percent to ¥16.2 trillion in 2008, the biggest decline since comparable data became available in 1986. In December alone, the surplus fell a record 92.1 percent from a year earlier.

Ikeda said exports will probably remain weak as uncertainty lingers over when the U.S. and Chinese economies will recover.

Consequently, the government should put emphasis on nurturing businesses that create long-term domestic demand, such as in medical services, nursing care and information technology, he said.

"What Japan really has to do is to create demand for money. Without it, increasing the money supply is meaningless," Ikeda said.

He criticized the government for responding conventionally to the recession. Pouring money into the construction industry, which has virtually no growth potential, will do little for the economy in the long run, he said.

"The government builds roads and buildings in remote areas. Who uses those?" he said. On the other hand, he said, "Increasing the number of nurses and caretakers will be good as many people use the services and demand for such services is long-lasting."

The government should not help companies in less productive industries such as construction, and try to shift workers to more productive industries, he said.

Ikeda said the recession is "a good lesson" because it gives Japan the chance to really change its economic structure to reduce reliance on export-oriented companies.

While other economists have called for increasing the money supply, Ikeda believes this will have little effect, although he does allow the BOJ must do something.

In the short term, Ikeda would like to see the BOJ start buying long-term corporate debt rather than short-term debt including commercial paper, which the bank is already doing. The BOJ has been reluctant to buy long-term corporate debt to avoid excessive risk.

The government should also, in his view, consider revising the law to allow the BOJ to underwrite government bonds.

"Buying risky assets would be a bold and untraditional measure for the BOJ. It is difficult to expect the BOJ to do more than that," he said.

"The current situation is that the world economy is on the way to correcting its trade imbalance," he said, referring to the excessive trade surpluses of Japan and China with the United States. "It is impossible for Japan to put (such trade figures) back into imbalance (where Japan can enjoy massive surpluses)."

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The Japan Times

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