To Expand Demand, First Widen Debate

Nikkei Weekly Feb 16, 1998


'Beware the ides of March," the ancient Romans used to say, and the same could apply in Japan as the tribalistic consensus seeks to will a sangatsu kiki (March crisis) on Prime Minister Ryutaro Hashimoto for his alleged failure to realize in time that the economy badly needs stimulation.

On a TV Asahi talk show I attended recently, a key member of the conservative anti-Hashimoto grouping in the ruling Liberal Democratic Party, Shizuka Kamei, called for the elegantly pomaded Hashimoto to shave off all his hair and apologize to the nation. I tried to suggest that if Hashimoto had got it wrong about the economy, then almost the entire Japanese establishment, including many in the Kamei grouping, should also be taken to the barbershop since they too had supported last year's push for fiscal stringency.

Now they have about-turned and welcome fiscal stimulation.

Fit of bravado

How did the world's No. 2 economy manage to bumble so badly? Even a first-year economics student can tell you that in the face of deflationary pres- sures, restrictive fiscal policies are a form of national economic suicide simi- lar to that of the ITS. in the early 1930s. This is especially true for Japan, since with interest rates close to zero, fiscal policy is the only tool left to stimulate the economy.

Yet in a fit of bravado not unlike that of an influenza patient seeking a cure by walking in the snow, Japan managed as recently as two months ago to convince itself that severe cuts in public-works budgets and legislation to cut deficit bonds to zero by 2003 would somehow revitalize the economy. The result? Bankruptcies soared, the yen collapsed and the stock market went into a coma. The U.S. for once has managed to give Japan the right economic advice: Expand domestic demand and do it quickly. But telling Japan to cut taxes to stimulate that demand is not the answer. Japan's notoriously high savings propensity theans that much of the tax cuts will simply end up as increased savings, the last thing Japan needs right now.

More than anything else, Japan's key economic problem is the lack of demand caused by this high rate of personal and national savings. During the pre-1973 high-growth period, Japan could rely on firms to borrow and invest the surplus savings. Then for almost two decades it relied on export surpluses and an artifi- cial "bubble" to fill its demand gap. Today Japan has no choice but to turn to the government to mobilize the funds that individuals and firms do not want to spend, and use them in ways that stimulate demand.

As this point, Japan's economic gurus swing into a highly negative mode. The level of official debt is already dangerously high, they say - over ¥ß500 trillion ($4 trillion). But with savings at ¥1,200 trillion it could also be argued that there is still plenty of leeway left. And the U.S. has shown how easily deficits can be cut once an economy starts moving.

The gurus criticize the waste and corruption involved in much government spending. But in that case, get rid of the waste and corruption and concen- trate on what is useful; keep the baby and throw out the bath water. But no one wants to offend the waste and cor- ruption makers by treating them for what they are - dirty bath water. So Japan finds it easier to get rid of the baby. Kokyojigyo, or public works, have become almost dirty words in Japan.

Much fuss is made about the inability of many public-works projects - bridges and railways, for example - to cover fully capital repayment and interest costs. But in any sensible economy it is taken for granted that if such works provide the nation with indirect benefits, then tax funds should be used to fill any deficit. Japan could easily gain such funds through reforms to its inefficient tax system.

But Japan does not even reach that level of argument, since there is also almost no recognition of the indirect benefits from major infrastructure projects. For some deeply tribal "think- small" reason new shinkansen bullet- train lines draw special antipathy, despite the enormous stimulation they offer to local economies.

As for the widely held belief that Japan's efficient postal savings and insurance schemes should be privatized because they provide funds that end up financing unprofitable government pro- jects, here we really are deep into baby bath-water land. The post-office system provides a cheap and highly efficient means for mobilizing surplus domestic savings, and Japan wants to hand it over to an inefficient and fairly corrupt private financial system, simply because some of the funds the postal system mobilizes end up being appropriated by others for wasteful and corrupt purposes. Whew!

Conservative respect

Underlying much of Japan's immature economic debate is a deeply conservative respect for the way 1980s Reaganite/Thatcherite "reformist" policies of deregulation, liberalization, privatization, alleged fiscal stringency, etc. are supposed to have expanded the economies of the U.S. and the U.K. today and of New Zealand and Australia until recently. Few seem to realize that much of the rebound in these economies was due to the protectionist effects of the savage currency depreciation caused by those policies, the very opposite of liberalization.

True, some of the reforms have provided long-term gains, particularly liberalization of labor markets. But in the short term, most of the reforms in which Japan's policy-makers place such faith, the "Big Bang" especially, will have equal if not greater deflationary effects.

As well, all the Anglo-Saxon economies enjoy very low savings rates. In the past this was a constant cause of infla- tion and stop/go economic policies. Today that problem has been largely overcome by the willingness of Japan and others to lend surplus funds, and by developing nations providing cut-price imports. Low savings and high con- sumption have become virtues rather than vices.

Japan faces a very different situation. It needs to work out its own solutions for its economic problems.