The Japanese economy is now out of the worst phase of the recession. But the process of achieving recovery and even- tual prosperity has not been entirely smooth. First, we cannot yet claim that firms in various industrial sectors have earnestly initiated their restructuring with real zest. Second, fiscal expenditures have been declining since last April, reducing the real GDP growth rate again.
The Japanese government has been euphoric since it discovered that in the January-March quarter of this year the real GDP growth rate rose to 1.9 percent (and an annualized rate of 7.9 percent). As a result of this euphoria, the government failed to propose any significant antirecession measures in the June-August special session of the Diet.
Yet Prime Minister Keizo Obuchi pledged to U.S. President Bill Clinton and other members of the G7 last June that his administration would definitely attain its announced target of 0.5 percent growth in real terms in the 1999 fiscal year. Therefore, it is quite likely that the government will make desperate efforts to pass its “supplementary emergency budget” for another round of public works this fall.
Should the Obuchi administration do this, however, it would unavoidably complicate the process of real recovery of the Japanese economy. This economy is already suffering from accumulated deficit bonds in the amount of 134 trillion yen. (The total amount of national bonds is 327 trillion yen.) This is bound to increase the tax burden on future generations. Besides, this has already raised the long-term interest rate, which has so far been suppressed by the extraordinary zero percent interest rate policy (in the overnight call loan market) of the Bank of Japan.
Nevertheless, what must be stressed here is that the basic factors for recovery are now making healthy improvements. Although virtually all firms (9,400 firms) still suffer from a negligible increase in sales revenues (-7.7 percent in ’98 and +0.3 percent in ’99), their average rate of profit is now decidedly rising (it was -16 percent in 1998 and is 20 percent in 1999).
The fundamental cause of the fall in revenue is excess production, which puts downward pressure on both the prices of products and the rate of sales. Why, then, do firms keep producing so much? There are two reasons: a great number of redundant workers and a tremendous volume of excess production facilities.
Because of past employment practices, companies are now in a very difficult position and unable to fire workers at will. In addition, firms are stuck with excess production facilities that they estimate totals 85 trillion yen. (I compute the total to reach 70 trillion yen.)
Most of these excess production facilities are very old. At the beginning of the 1970s, average plant age was about 10 years; now it is about 20. It is true that during the “bubble” period, many large firms aggressively made plant and equipment investments and incorporated the newest technological innovations.
Yet, it is now apparent that they did not improve the productivity of the previous capital stocks with those investments. Instead, they simply piled new plant and equipment on those old capital stocks, making their average age very old and rendering them obsolete.
This means, however, that the greater part of the excess production facilities — worth 70 trillion yen to 85 trillion yen — have already been completely depreciated. Some argue that about 20 trillion yen is still being depreciated. If this is correct, those facilities are comparatively new. Since the newly industrialized economies in Southeast Asia are now entering a new development phase, there may be buyers for these comparatively new facilities in those countries.
At any rate, old and excess production facilities should not cause serious problems for their owners. The problem will arise only when they start to scrap them. Financially healthy companies must be able to borrow funds from banks and use their stock as collateral.
Thanks to the “excess reserve deposits” that private banks are now accumulating as a result of the BOJ’s zero interest policy, those banks have ample funds to lend. Whether they actually make loans depends upon how high the profitability of a proposed project is. Therefore, scrapping activities alone will not easily allow many firms to raise funds in financial markets.
If Japan’s production facilities are to become young and efficient again, it is imperative that firms combine scrapping activities with those for building up new facilities. And these new investments must embody the newest technological innovations as much as possible.
In this context, however, Obuchi, who organized the Council on (Japan’s) Industrially Competitive Power, should enact tax-reduction measures for plant and equipment investments that would reduce the current effective corporate tax of 40 percent to 35 percent for five years.
It must be realized that this tax reduction is a genuine means of creating and enlarging tax bases. This will increase corporate tax revenue as soon as new investments are completed and begin to produce high-quality new goods. Moreover, new investments are the only way of truly increasing employment.
If such tax reduction measures, which would generate tax revenue, start in 2000, the Japanese economy will grow 3.5 percent a year, beginning in 2003 or so. The current consensus among Japanese economists is that Japan’s GDP growth potential is as low as 2 percent. But this is a reflection of the pessimism that was caused by the prolonged recession.
The U.S. economy has recently been growing at a 3.5 percent rate in real terms. This high rate was made possible mainly thanks to the information revolution, which was promoted by the explosive growth of the microelectronic industry. Japan has already shown signs that it too can experience such growth, even though the diffusion rate for personal computers in the household sector is only 30 percent, in contrast to 90 percent in the U.S., which has already succeeded in building up the necessary infrastructure for the revolution. Yet it is precisely the delay experienced by Japan in this sector that promises GDP growth as strong as that in the U.S. in the first decade of the new century.
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