Here's the thing that I think is the root source of the disappointment: No tax cuts. Seems like the idea that the LDP has is that it's okay to spend government money on projects they control.
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David DeRosa: The Problem With the Latest Japanese Stimulus Package
By David DeRosa
Special to TheStreet.com
3/27/98 1:30 PM ET
No denying it, the LDP's package is a whopper. Sixteen trillion yen. Public spending projects all over the place. So what's the problem? Isn't that what everyone was screaming for them to do all along? Why doesn't this satisfy the market skeptics, like me, who say Japan will continue to wallow in the recession?
First thing is to realize that all of us who watch Japan have been down every possible road of false hope in the past eight years. We are so used to doubting Japanese policy that anything new that comes along is met with total skepticism. This is not entirely irrational given the seemingly endless series of gross macroeconomic blunders that the Japanese authorities have committed -- the hike in the consumption tax being the most recent example. Point in fact: Nobody trusts the Japanese to get it right.
But we all trust them to try to spin the dickens out of every development. There is this crazy way of thinking in Japan that making things look good will have the effect of making things be good. That's my leading rationale for why I can think that they want the yen stronger. Every scrap of reason should tell them to let the exchange rate go to 140 or 150 -- after all, they originally built the place on exports, so why not do it again? But there they are, jawboning like crazy to keep the yen strong.
Then there's the interest rate puzzle. Policy makers seem driven to raise rates, thinking that this will boost the economy. Dress for success even if you are busted. This is particularly foolish given that the LDP wants to have a public-works-style stimulus program. Wake up, guys -- you get your biggest bang for your yen if interest rates do not go up!
Now back to the package. Here's the thing that I think is the root source of the disappointment: No tax cuts. Seems like the idea that the LDP has is that it's okay to spend government money on projects they control. And it's also okay to borrow money to do that. As a side note, it's curious that they want to dub this new borrowing as "construction bonds." This tells me that they want to segregate it from the rest of the government debt, as if to say that this is not a deficit finance item.
What is not okay with the establishment is to cut taxes, let the people spend the money and have the government borrow the shortfall. Somehow that's abhorrent to the Ministry of Finance and the politicians. Too bad. Sounds like a much better plan to me. Especially if they monetize the bonds, meaning let the Bank of Japan buy the bonds and gross up the money supply.
Part of the problem is that the LDP has been telling the Japanese people for decades about the fiscal sins of Washington, D.C. Japan should not fall into the Ronald Reagan fiscal trap. Bad for the country, bad for the currency and bad for the people. An other, more subtle issue is that the authorities just plain don't trust the people to spend the money -- it seems like they think big decisions should be made by Big Brother rather than the Japanese man on the street.
Two myths died last night. One is that the government intends to use the Postal funds to prop up the stock market. Well, I think it died, going on wire service reports. That's part of the reason why the Nikkei took a dive. The other fraud to go paws up was the nonsense report that the Bank of Japan was going to launch the mother of all interventions to drive dollar/yen down to 125 for some screwball Japanese accounting trick. Oh, the nonsense that sometimes circulates as fact in the foreign exchange market. |
