Prime Minister Keizo Obuchi, citing a popular proverb, says his administration will not “run after two hares”: It will first achieve economic recovery and then tackle fiscal reform. The official scenario is that the economy will pick up soon. The question is what will happen next. Without fiscal props, growth might again come to a grinding halt, making it necessary again to prepare large spending packages. Thus the government might end up missing both hares. That is why consumers keep their purse strings tight and why businesses are reluctant to invest in new equipment.
Wits its fiscal house in a shambles, Japan is racing against time. To prevent the nation from falling into fiscal quicksand, the government must follow a two-pronged policy of running after two hares — that is, putting the economy back on the course of self-sustaining expansion led by private demand and at the same time mapping out a long-term program of fiscal reconstruction.
The root of the recession lies in a supply-demand gap in the economy: Private demand falls short of supply capacity by about 10 percent of gross domestic product. Consumer spending, to be sure, is sluggish, but expressed as a percentage of GDP it remains fairly stable. The problem is the slump in private investment. The fundamental reason for this is that Japan has neglected to create an investment infrastructure that meets the demands of economic globalization and the information-technology. revolution.
Japanese companies are moving to investment-friendly and low-cost countries not only for the production of goods but also the production of services such as research and development, computer-driven word processing and software programming.
While businesses must select where they will produce and hence employ labor, the government has the responsibility of helping secure employment and a livelihood for the people. That responsibility can be fulfilled only by building an investment infrastructure tailored to the needs of a globalized market.
To develop such an investment environment it is essential to (1) minimize the restrictions on corporate activity, such as market access regulations; (2) facilitate the movement of labor and other resources to IT-related and other growth industries; (3) create conditions conducive to research and development; and (4), keep costs reasonably low by international standards.
To secure a private demand-led recovery and avert a fiscal disaster, the government should set a specific target designed to close about half of the supply-demand gap. It should aim to expand capital investment and housing construction so that it reaches about 5 percent of GDP and thereby cut the fiscal burden in half. To achieve that target, budgetary and nonbudgetary measures should be put in place.
First, capital investment should be increased by 2 percent to 3 percent of GDP. Simple arithmetic shows that if the share of IT-related investment in capital investment is expanded from the present 20 percent to 40 percent, or about the same rate as that in the United States, its share of GDP will rise from 3 percent to 6 percent.
The IT revolution in the U.S. received a big boost in its early stages from the U.S. government, which launched an “Information Highway” project designed to link classrooms, libraries and hospitals across the country. Deregulation secured free competition and encouraged private investment in the communications and related industries. The Internet developed rapidly at the grassroots level.
The U.S. experience shows that Japan also should promote the IT revolution under a national program and, to that end, should initiate structural reforms immediately and take bold budgetary measures. Public spending on social infrastructure related to information and telecommunications is far too small compared to public-works spending. It is a pity that a 4.8 billion yen appropriation for Internet promotion and personal-computer tax breaks for small businesses should be touted in the media as features of the 2000 government budget.
As for capital investment in general, it is also necessary to take budgetary measures, including accelerated depreciation to encourage such spending.
Exchange-rate stability is effective in reducing the outflow of capital investment from Japan. Lack of stability — the currency’s sharp rise — is a major factor in the shift of manufacturing to low-cost locations overseas. Production of goods now receives less attention than before, due to the large and growing share of services in the economy. However, without sound manufacturing, it is impossible to secure employment for the 65-million-strong labor force.
Second, the current incentives for housing investment leave much to be desired, not only in qualitative terms but also in the sense that they are temporary. If they are improved and made permanent on a level comparable to U.S. measures, the share of such investment in GDP may well expand by about 2 percent, from 4 percent now to 6 percent, a figure that was recorded during a past expansionary period.
It is widely believed here that a self-sustaining economic recovery will begin sooner or later if demand is stimulated through increased government spending. However, even the government of the U.S., the champion of free markets, is providing support to the IT revolution and housing construction. Given the serious shortfall of demand, the Japanese government should provide at least roughly the same level and quality of IT housing investment incentives as those in the U.S.
To increase private investment means using an estimated 1.3 quadrillion yen in personal financial assets for long-term national interests. The reactivation of capital investment of strategic importance will adapt this country to globalization and the ongoing IT revolution. Incentives for residential investment will help create a better living environment that the citizens of the world’s second-richest country deserve.
An empirical study of the Pacific War ascribes the failures of the Japanese military partly to complacency about its successes in the Sino-Japanese and Russo-Japanese wars and partly to the absence of both grand designs and contingency plans.
Today the government is using the same old fiscal policy of the high-growth era to bring about an economic recovery. It has not produced a general strategy for achieving sustainable growth and fiscal reconstruction, nor has it presented plans to deal with a possible economic relapse. So the people have vague fears that Japan might not be able to achieve both objectives.
What is needed now is a game plan to catch two hares. First, the government should draw up a strategy and a broad plan of action to secure employment and livelihoods in the 21st century through private demand-led growth and fiscal consolidation. Then it should forge a national consensus along these lines and set a solid direction for Japan’s economic policy. If this is done, the current unrest among the people and in private industry will decrease, and markets will begin to react positively.