The United States has been urging Japan to expand domestic demand, as if that was the only policy Japan could implement to help promote recovery of the global economy. Washington repeated that demand at the recent Group of Seven meeting of finance ministers and cen- tral bankers.
It should be noted that while U.S. domestic demand is booming, the nation’s savings rate has fallen to a record-low level; it has even posted minus figures in some months. On the other hand, Japan boasts a whopping 1.3 quadrillion yen in savings accounts held by individuals, the largest in the world.
Americans and Japanese have radically different spending habits. Americans go on a spending spree that sometimes involves going into debt, while Japanese minimize their spending to save. Americans tend to spend more than they can afford, and that is not a healthy sign. The U.S. spending binge makes me think of Japan’s “bubble economy,” which burst a decade ago. It could be a precursor to a major economic disaster.
To be sure, the Japanese economy is distorted. Japanese manufacturers have regained strength in recent months, as their increasing capital spending, production and shipments show. But consumer spending remains sluggish. Japan’s economic recovery hinges on growth in consumer spending, which totals 300 trillion yen and accounts for 60 percent of the gross national product.
Japanese now have a disturbing tendency to call for government aid in order to solve recession-related problems, but government spending is much smaller than consumer spending.
In a televised debate last year in which I appeared, a certain lawmaker said, in a rather condescending manner, that the government would set aside 17 trillion yen for public-works spending as part of economic stimulus measures. I told him that was not much, compared with the 30 trillion yen in revenues earned annually by the nation’s pachinko parlors. I reminded him that consumer spending dwarfed public-works spending.
There was nothing new in my remarks, but all the economic stimulus measures are still based on government expenditures and monetary policies. That confuses the public. Consumer spending is sluggish for the sole reason that the “social atmosphere” is damp.
The late Japanese author Shichihei Yamamoto, in his “Kuki-no-Kenkyu” (The Study of the Atmosphere), wrote that Japan entered World War II because of the prevailing “social atmosphere” in those days, even though everyone was aware that it had no chance of winning.
The present Japanese recession stems from the national mood. Experts say the nation’s economic slowdown has continued after the bubble burst a decade ago. Economic data disprove the claim. In 1996, for example, Japan posted economic growth of 3.6 percent, the highest among industrial nations and higher than the comparable U.S. rate of 2.5 percent. Only four years ago, the Japanese economy was prospering, thanks in part to a 4.2 percent gain in domestic demand. Pundits fail to take note of this.
The boom collapsed after the bankruptcies of Hokkaido Takushoku Bank and Yamaichi Securities Co. and a series of payoff scandals involving banks and brokerages. For a year and a half, newspapers featured financial scandals in their top stories almost daily. The campaign ended with the exposure of scandals involving senior officials of the Finance Ministry and the Bank of Japan. I suspect that prosecutors stopped investigating financial scandals to prevent them from eroding trust throughout the entire society. The probe caused a slowdown in consumer spending, however.
In the national economy, companies were the first to regain strength. Little concerned about “national mood,” companies are actively pushing restructuring efforts, developing new products and increasing earnings. However, the damp “social atmosphere” that discouraged consumer spending for a year and a half is unlikely to recover anytime soon. The government needs to do everything possible to change this mood.
Fortunately, recent media reports show that the worst is over for the national job shortage and that the employment situation is improving. Some companies have doubled employment plans this year to take advantage of the information-technology boom. These reports are definitely encouraging.
I believe that Japan should now end its de facto zero-interest rate policy, despite objections raised at the G7 meeting of top financial officials. It could be done, since the Cabinet of former Prime Minister Keizo Obuchi had reportedly been considering changing the policy. The policy change would be a highly effective measure to be announced by new Prime Minister Yoshiro Mori’s administration. It would change widespread perceptions at home and abroad that the government is helping only banks to make money. The new policy would not cause volatility on the foreign exchange market. Once the Japanese government shows strong determination regarding the policy, foreign speculators will retreat.
In the past the Japanese government has shown little international leadership. There is a widespread feeling that the Japanese have a huge amount of money but do not know how to spend it, while constantly worrying about others’ spending habits. That will change if the monetary authorities end the zero-interest rate policy.
A new monetary policy will stimulate consumer spending. A new economic outlook will help create more venture businesses. There will be enough money to fund them. Recovery in consumer spending is certain to activate the economy. It is up to the authorities to make up their minds and implement the new policy.
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