A peek into our future, 15 or 20 years from now
Economic foolishness deepens
By GREGORY CLARK
We knew that Japan's economic debate was fairly foolish
when Prime Minister Junichiro Koizumi told us that
structural reforms such as privatizing highway corporations
and the post office would somehow revitalize the Japanese
economy. But even that looks sensible compared with the
latest proposed "reform" -- purging banks to abolish bad
loans. Nonperforming loans are a result, not a cause, of
Japan's poor economic conditions. Most bad loans are the
direct result of bankruptcies and falling asset values
since Japan's reform mania began in 1997. Purging banks
will create even more bankruptcies, more asset price falls
and more bad loans.
Even Koizumi supporters admit some of this. Yet they seem
caught up in a semireligious belief that cleansing the
financial stables will somehow allow Japan to make a fresh
start. Many in the United States thought the same after the
1929 crash, and we know what happened after that.
True, Japan's bad loans were morally repulsive, with money
poured into the pockets of gangsters, corrupt politicians
and mad speculators for years. But economically they are
history. Every economy has large areas of waste -- the
military, festivals, official incompetence, excessive
welfare, the 40 billion yen being spent on Koizumi's new
official residence. But provided the money returns to the
economy, the economic damage is low.
For years the pundits told us that China's bad loans to
inefficient state enterprises -- then put at 25 percent of
GNP as against the mere 8 percent for Japan's bad loans --
would break the Chinese economy. Today, as booming
investment and consumer demand pushes that economy even
further ahead, the problems, and the pundits, are quietly
disappearing.
Bad loans cause harm only if they weaken bank reserves.
Japan's banks have money to lend. What they lack is
creditworthy borrowers, thanks to Koizumi's policies. Fears
of being purged forces them to be even more wary in their
lending policies. Somehow the Koizumi people turn this
round to say that the banks' reluctance to lend causes the
bad economic conditions and thus justifies the purging.
The shallowness of Japan's economic debate is appalling. A
hard core of senior coalition politicians close to the
economy tries hard to warn the prime minister of the
deflationary dangers they see on every side. But he just
aimlessly repeats his "no pain, no gain" mantra, and most
of Japan is happy to follow, Pied Piper-like, behind.
Foreign pundits indoctrinated in the leftwing evils of
government spending join the queue. So does the U.S.
government. It says a resurgent Japan is needed as an
economic counterweight in Asia to China.
For those who believe that a subdued Japan is necessary for
a stable Asia, Washington's economic wisdom is most welcome.
Japan's basic problem should long ago have been obvious. It
is the chronic lack of consumer demand. Even the Koizumi
people admit that consumers are not spending enough. Their
glib explanation is that lack of reforms makes people
anxious about the future. But in that case why even at the
height of bubble optimism were household savings only a few
points below today's very high levels? Economic damage was
averted only by the two-decade-long export and asset boom,
now ended.
Three factors help explain the high savings rates. One is a
skewed wage system that favors the nonspending elderly.
Another is the massive transfers of wealth into the coffers
of the same gentrified people during past land booms --
more than one half of Japan's extraordinary 1.4 quadrillion
yen of personal financial assets is held by people over 65.
Finally, strong workplace identity means most salaried
people have neither the time nor the incentives for the
lifestyle spending that today keeps most other advanced
economies bubbling along.
On top of all this are typical Japanese worry-wart concerns
over the future, even when times are good. None of these
factors is likely to disappear soon.
What to do? Deregulated and new service industries might
help create some new demand and investment. But don't hold
your breath waiting. Meanwhile Japan's demand gap expands
daily. The latest figures are frightening. Since reform
mania hit Japan, worried individuals have added 20 trillion
yen to bank deposits, while firms preferring to repay loans
rather than risk new investments have added a net 20
million yen.
Lacking borrowers, banks have spent 30 trillion yen of
those surplus funds buying government bonds, despite low
interest rates. The pundits who warned us that large
official deficits would cause a crisis-inducing flight from
government bonds now have even more egg on their faces.
If individuals and firms don't want to spend, then clearly
the gap has to be filled by government spending, financed
by more bond sales to soak up more surplus funds or by
increased taxes. Needless to say, Tokyo wants to do the
exact reverse. It wants to cut government spending, and
embraces tax cuts which in Japan, unlike in the U.S., have
only weak stimulatory effects.
Tokyo also tries to rely on monetary policy levers, which
are useless when interest rates are already close to zero.
Fiscal policy is now the only answer. A massive burst of
extra spending -- say 10 trillion yen to 20 trillion yen --
into areas with high employment and flow-on effects is the
only way this economy can be turned round.
The arguments against fiscal remedies range from the silly
to the ridiculous: They lead to waste and corruption, we
are told. Well, get rid of the waste and corruption. They
were tried in the past and did not work, it is said. In
fact, they worked very well before 1997, and in any case
they were meant mainly as a much-needed prop, not as a
stimulus, to the economy.
They will add to the official deficit, it is also claimed.
True, the official deficit is high, but is still only half
of the bloated 1.4 quadrillion yen total for personal
financial assets. And so on.
Tokyo now says it is creating a special government agency
with a 10 trillion yen-20 trillion yen budget to rescue and
help reorganize worthwhile firms sent bankrupt by the
planned bank purges. I have a better idea: Instead of
spending the money after the firms collapse and deflation
gets out of control, why not spend it beforehand?
japantimes.co.jp
When American people realize they have no Social
Security, no Medicare, none of the retirement benefits
they thought they had, they too will save, and save, and
become very miserly. Their frightened children will see
what the ageing boomer future brings, and they too will
save and save for the future. This is the legacy of a fend for yourself attitude
that is imposed late in the career track. The future is now, in Japan |
