Some economists compare it to trying to lose weight by fasting when the real solution is exercise, while others talk about repairing an airplane’s altimeter when it’s the engine that needs attention.
However you look at it, Prime Minister Junichiro Koizumi’s economic policy has failed to turn around Japan’s stagnant economy.
When Koizumi became prime minister in April 2001, backed by record approval ratings, he promised to restrain the rapidly ballooning fiscal debt and pledged a clear departure from his predecessors’ heavy dependence on huge public works spending.
“The economy will not recover without structural reforms,” he said, and promised to help spur new industries and introduce competition to areas that have long been strictly regulated — such as education, medical services and social welfare.
His efforts were largely unsuccessful, however, meeting with strong opposition from the old guard within his party and bureaucrats with influence over such sectors.
Economists meanwhile say Koizumi has been shackled by the numerical goals he set to limit budget deficits. The lack of flexibility in his fiscal policy resulted in a failure to beef up the business sectors needed to act as the nation’s main economic engine.
“Koizumi has relied too heavily on the ideal of a balanced budget,” said Kenji Yumoto, chief senior economist of Japan Research Institute Ltd.
Japan’s current fiscal debt has hit the dizzying height of 450 trillion yen — equal to 11 years of tax revenue. If stacked in bundles of 10,000 yen bills, according to the Finance Ministry, the amount would tower 500 times higher than Mount Everest.
To stop the red ink from flowing, Koizumi declared a cap on new government bond issues at 30 trillion yen for fiscal 2001. But he was forced to back down when the government compiled a supplementary budget in late 2002, announcing it would issue nearly 5 trillion yen in new government bonds, partly to finance economic stimulus measures.
Due to dwindling tax revenues amid the ongoing recession and the increasing social welfare burden created by the nation’s aging population, new bond issues are expected to reach 36.4 trillion yen in the current fiscal year — almost half the size of the national budget.
Koizumi’s other numerical target also appears unreachable.
The prime minister hopes to realize a primary budget balance — a condition in which expenditures excluding debt-servicing costs are fully covered by tax revenues — in the early 2010s.
But Japan is expected to post a primary budget deficit of 19.6 trillion yen in fiscal 2003, up from a deficit of 18.9 trillion yen the previous year. In fiscal 2001, the deficit was 13.7 trillion yen.
“Costs for social services grow about 1 trillion yen every year,” Yumoto said. “So in reality, the government needs to cut public works and other spending by as much as 3 trillion yen each year to secure the primary balance in the early 2010s.”
The initial national budget slipped 1.5 trillion yen to 81.2 trillion yen in fiscal 2002, only to grow to 81.8 trillion yen this fiscal year.
If the government continues to put off making drastic cuts to expenditures, economists have warned, it will eventually have to raise the consumption tax, a major source of tax revenue for the national budget.
Hiroshi Okuda, chairman of the Japan Business Federation (Nippon Keidanren), expressed serious concerns about the nation’s health in January. He proposed raising the consumption tax by 1 percentage point every year beginning in fiscal 2004 until it hits 16 percent in fiscal 2014.
But Koizumi, apparently hoping to maintain his popular support, shrugged off the proposal. He has repeatedly said that a tax increase will not happen while he is in office.
Naoyuki Yoshino, a professor of economics at Keio University, said the country’s bond issues have almost reached the saturation point in terms of the future burden of interest payments. This could lead to a sharp tax increase in the future, he said.
Japan Research’s Yumoto said the government should not be so closely focused on limiting budget deficits with numerical targets while the country remains mired in the economic doldrums.
“Basically speaking, the government should freeze a cap on budget deficits when the economy starts to shrink,” he said. “But Koizumi has stuck to his fiscal goals, even while the economy is in a state of deflation. So the government failed to allocate enough budgetary funds for economic stimulus measures.”
Various economic data have turned south during the past 2 1/2 years. In response, Koizumi released three economic-stimulus packages, featuring steps to create jobs, support small and midsize businesses and promote information technology.
These steps have had little effect on the economic data, however.
Japan’s real gross domestic product — which stood at 3.2 percent in fiscal 2000, the year before the launch of Koizumi’s first Cabinet — sank to minus 1.2 percent in fiscal 2001. In fiscal 2002 it was 1.6 percent.
Meanwhile, the unemployment rate on a monthly basis leaped to a record 5.5 percent twice last year and in January this year.
And in April, stock prices on the Nikkei average tumbled to 7,607.88, the lowest level in more than 20 years. In August, the Nikkei had recovered to above 10,000 but remained below the level seen when Koizumi came into office.
Economists have welcomed the fact that Koizumi has not resorted to economic-stimulus measures, blindly injecting money into public works projects such as highways, airports and bridges like his predecessors.
Public works spending for fiscal 2003 stands at about 8 trillion yen, down more than 1 trillion yen from fiscal 2000. The current level is close to that of fiscal 1992.
But Naohiko Jinno, a professor at Tokyo University, believes Koizumi’s reduction in public works spending has received more credit than it deserves.
“His stance (on public works) merely returned to what old leaders did in the 1980s,” he said. Koizumi’s moderate reduction in such spending was no different to what past leaders of the ruling Liberal Democratic Party had done for several years in the past, he said.
In 1984, the government said it would balance the budget without tax increases and cut annual spending for public works by about 2 percent each year.
This austere policy continued until 1990, when the asset-inflated bubble economy burst, Jinno said.
He said the priority of any economic policy is to find the real cause of the ongoing recession and bring about economic recovery. This would result in an increase in tax revenue, he said.
Jinno said that privatization, as Koizumi has advocated, will not lift the economy. The government must find new industries that can drive the economy, he said.
As an example, Jinno said the government must boost investment to create value-added products, such as information technology and intellectual property rights, while allocating a greater proportion of the budget to promoting science and education.