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Strategies & Market Trends : India Coffee House -- Ignore unavailable to you. Want to Upgrade?

To: Mohan Marette who wrote (3411)	12/19/1998 7:07:00 PM
From: Satish C. Shah	Read Replies (1) \| Respond to of 12475

Hello Mohan: Thanks for the story. Reminded me of Gods of Small Things. In addition to Kerala, had the desultory theme in common.. I printed and passed it on to my neighbors. It was their copy of Gods... I had read. Thanks again. Regards, Satish

To: Mohan Marette who wrote (3411)	12/23/1998 10:13:00 AM
From: Mohan Marette	Read Replies (1) \| Respond to of 12475

Japan-'Old people's home run by the mob' By:Rajiv Lall (Far Eastern Economic Review) Rethinking Asia - The doomsayers, says Rajiv Lall, see Japan as "little more than an old people's home run by the Mob." Yet he finds reason to believe the economy is about to turn the corner. Look Past the Sceptics -------------------------------------------------------------------------------- By Rajiv Lall -------------------------------------------------------------------------------- December 24, 1998 I n the case of Japan, reading the tea leaves is especially perplexing. At the end of the day it boils down to a matter of faith. Most foreign observers seem to lack faith in Japan. I would suggest that these pundits are wrong and I believe that seeds have been sown for a lasting economic recovery. At the risk of oversimplifying, views on Japan can be broadly classified into three camps. The view of the evangelicals is that Japan cannot be saved without a new religion. For these doom-mongers, Japan is little more than an old people's home run by the Mob. They see Japan's recession more as a depression caused by the failure of the "Japanese model," seen to be characterized by lack of transparency, cronyism, over-regulation, rigid labour markets and deteriorating demographics. These factors have resulted in dismal rates of return on investment, falling rates of productivity growth, and a vicious circle of sluggish economic growth and consumer and investor pessimism. The evangelicals have little sympathy for the power of reflationary macroeconomic policy. The belief is that Japan's problems are structural, not cyclical. It follows that recovery in Japan would be impossible without significant structural reform, including a sweeping clean-up of the banks and across-the-board deregulation. I have little sympathy for this perspective. Trying to solve all problems at once is simply not feasible. It would risk damning the very people that these guardians of the pure faith want to save. In the second camp lie the sceptics. They grant that Japan must first pay attention to counter-cyclical measures before worrying about structural reform. They understand that while Japan does face significant structural problems, the reality is that the economy is today functioning at way below its capacity because of severely depressed domestic demand. They accept that expansionary macroeconomic policies have a critical role to play in getting Japan back at least up to its potential growth rate, but they are pessimistic about the ability of the Japanese to put the right policy mix in place. In particular, they question the effectiveness of fiscal stimuli. They fear that the government cannot afford any further accumulation of debt without falling into a "debt trap" in which an increasing proportion of expenditures is spent on servicing debt. They also worry about "Ricardian equivalence"--the phenomenon in which the expansionary impact of any increase in the fiscal deficit is countered by increased savings from Japanese households worried about their future tax liabilities. The sceptics thus favour aggressive monetary expansion over fiscal policy. They reason that the only way to induce the Japanese to spend more today is to convince them of their central bank's willingness to cause accelerating future inflation. This, although an interesting notion, could be dangerously destabilizing. The third group is the camp of the next prophet. They believe that fiscal policy can lift consumer confidence, and that Japan is taking action to rejuvenate itself. I find this camp to be the most persuasive for many reasons. First, while Japan's ratio of gross debt to GDP is high, its ratio of net debt to GDP is the lowest of all OECD members. Second, there is little hard empirical evidence for the phenomenon of Ricardian equivalence in Japan. Third, the evidence from the past eight years is not that fiscal policy does not work, but that it works only if applied with sufficient vigour. Over this period, contrary to common perception, there was only one year in which the fiscal stimulus reached any size. That was in fiscal 1995, and interestingly enough, the economy did respond with a significant 3.2% GDP expansion in 1996. During the following two years, the fiscal stance caused a contraction, and was exacerbated by the consumption-tax rise in 1997. It is hardly surprising that the Japanese economy slumped once again. The bottom line is that Japan need not fear the long-term consequences of using a more aggressively expansionary fiscal policy today. The government has realized this and has now delivered a fiscal package that will be one-and-a-half times the size of the only successful package of the past decade. The prospects for the success of the latest stimulus are good not only because of its size, but because of the complementary measures that the government is undertaking to bolster the banking system. The government's bank-assistance plan of a few weeks ago was an important step towards stabilizing the financial system. Several subsequent actions have further improved the outlook, so consumer confidence should be on the mend, and the banks should be better placed to resume lending. Conditions are therefore ripe for a solid fiscal stimulus to do its job. Once the effects of that stimulus begin to take hold, I believe that we will see confidence returned to the Japanese consumer and investor. This will in turn unleash the animal spirits necessary to drive a lasting recovery. Rajiv Lall is the Hong Kong-based executive director of E.M. Warburg Pincus & Co., an investment firm.