Is there no end to Japan’s economic policy merry-go-round? In 1996, the rationalist economists persuaded the politicians to raise taxes and cut public spending in a bid to reduce the large public debt. When the economy slumped as a result, the government moved quickly to cut taxes, increase public spending and shelve the debt problem.
Now the rationalists are at it again, complaining about a predictably even larger debt problem. But does this mean they want to cut the public spending seen as crucial for reviving the economy? A choice has to be made, for as Prime Minister Keizo Obuchi points out, if you chase two rabbits simultaneously you end up with none.
He should also tell the opposition parties now yapping at his heels about the debt problem, that it was precisely they who three years earlier were nagging constantly about the need for permanent tax cuts. Permanent cuts guarantee a very serious debt problem for a very long time. And since the cuts are largely saved, they do little to expand demand.
Japan’s key economic problem remains as before — the persistent lack of domestic demand, as represented by Japan’s very high savings level. Already a massive 1.3 quadrillion yen is locked away in personal financial assets.
Everything and anything should be done to get more of this money pumped back into the economy. If government borrowing to finance public works is the only immediate answer, then so be it. The alternative is endless stagnation. Now it is clear that even a zero interest-rate policy has failed to stimulate private spending.
Many worry about the waste and corruption in public works. Well, in that case, get rid of waste and corruption and keep the spending.
Some worry about the future interest burden from rising public debt. But if the economy stays flat, the interest burden stays low. If the economy takes off then, as in the United States, tax revenues rise and the debt declines.
But, ultimately, Japan has to do something about the problem of weak household demand. Back in the 1980s, a leading writer for the London Economist published a book predicting Japan would be in trouble since its aging population would cut the savings then seen as the key to Japan’s economic progress.
In fact, Japan’s progress until the early ’90s was despite, rather than because of, its high level of savings. Its success was due mainly to opportunistic reliance on foreign demand for exports thanks to a cheaper yen, and artificial demand created by the prolonged land and share bubble. Both were destined to be self-terminating.
The prospect of Japan’s rapidly growing elderly population drawing down on their savings — they own half of that 1.3 quadrillion yen — is one bright spot in the current economic gloom.
The other bright spot is the share-market boom continuing, and encouraging the speculators back into the market. Bubble collapse did not mean the disappearance of the trillions of yen now chalked up as bank loan writeoffs. It meant simply that dumb speculators — those who bought land and shares at the height of the bubble — had lost that amount of money to smart speculators — those who sold land and the shares then.
The money still exists, and can be brought back into the economy the moment those smart speculators feel the time is ripe. But that will require an improved land market, something that foolish government policies are still doing much to prevent.
On top of this, Japan has another and even more serious problem, namely the persistent weakening of demand and the dampening of investment caused by the declining birthrate. Japan needs something more than elderly spenders and smart speculators to boost its economy.
A first step would be to find out just why people save too much and reproduce too little. The current wisdom says they save because they are worried about their future. But that fails to explain why savings rates remain high even in boom times.
A better answer would focus on cultural factors — the emphasis on the workplace rather than lifestyle both as a source of identity and status. The same factor could also be a reason for the low birthrate.
In the U.S. especially, and in most other advanced economies, ferocious spending on lifestyle, whether for pleasure, family or status, has become a major prop for the economy.
Breaking down Japan’s workplace obsession could take time. In the meantime, Japan could at least do something to make lifestyle spending more attractive — good, cheap housing, better touring and vacation facilities in Japan’s very beautiful countryside, leisure outlets other than pachinko for urban Japanese, Florida-style retirement villages and so on.
But the declining population problem remains, and there will be a 20-year demand lag even if the birthrate does manage to recover. Japan needs an immediate program of controlled immigration, not just to generate new demand but also to break down some of the cultural biases that cut demand. It would also help ease the inevitable shortage of young labor if and when the economy does start moving again.
But don’t expect any swift action on any of these fronts. Another cultural bias says Japan does not move until it is hit with strong, visible and concrete pressures. The crisis of inadequate demand and population will remain invisible and abstract until much too far into the future.
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