We knew that Japan’s economic debate was fairly foolish when Prime Minister Junichiro Koizumi told us that structural reforms such as privatizing highway corporations and the post office would somehow revitalize the Japanese economy. But even that looks sensible compared with the latest proposed “reform” — purging banks to abolish bad loans. Nonperforming loans are a result, not a cause, of Japan’s poor economic conditions. Most bad loans are the direct result of bankruptcies and falling asset values since Japan’s reform mania began in 1997. Purging banks will create even more bankruptcies, more asset price falls and more bad loans.
Even Koizumi supporters admit some of this. Yet they seem caught up in a semireligious belief that cleansing the financial stables will somehow allow Japan to make a fresh start. Many in the United States thought the same after the 1929 crash, and we know what happened after that.
True, Japan’s bad loans were morally repulsive, with money poured into the pockets of gangsters, corrupt politicians and mad speculators for years. But economically they are history. Every economy has large areas of waste — the military, festivals, official incompetence, excessive welfare, the 40 billion yen being spent on Koizumi’s new official residence. But provided the money returns to the economy, the economic damage is low.
For years the pundits told us that China’s bad loans to inefficient state enterprises — then put at 25 percent of GNP as against the mere 8 percent for Japan’s bad loans — would break the Chinese economy. Today, as booming investment and consumer demand pushes that economy even further ahead, the problems, and the pundits, are quietly disappearing.
Bad loans cause harm only if they weaken bank reserves. Japan’s banks have money to lend. What they lack is creditworthy borrowers, thanks to Koizumi’s policies. Fears of being purged forces them to be even more wary in their lending policies. Somehow the Koizumi people turn this round to say that the banks’ reluctance to lend causes the bad economic conditions and thus justifies the purging.
The shallowness of Japan’s economic debate is appalling. A hard core of senior coalition politicians close to the economy tries hard to warn the prime minister of the deflationary dangers they see on every side. But he just aimlessly repeats his “no pain, no gain” mantra, and most of Japan is happy to follow, Pied Piper-like, behind.
Foreign pundits indoctrinated in the leftwing evils of government spending join the queue. So does the U.S. government. It says a resurgent Japan is needed as an economic counterweight in Asia to China.
For those who believe that a subdued Japan is necessary for a stable Asia, Washington’s economic wisdom is most welcome.
Japan’s basic problem should long ago have been obvious. It is the chronic lack of consumer demand. Even the Koizumi people admit that consumers are not spending enough. Their glib explanation is that lack of reforms makes people anxious about the future. But in that case why even at the height of bubble optimism were household savings only a few points below today’s very high levels? Economic damage was averted only by the two-decade-long export and asset boom, now ended.
Three factors help explain the high savings rates. One is a skewed wage system that favors the nonspending elderly. Another is the massive transfers of wealth into the coffers of the same gentrified people during past land booms — more than one half of Japan’s extraordinary 1.4 quadrillion yen of personal financial assets is held by people over 65.
Finally, strong workplace identity means most salaried people have neither the time nor the incentives for the lifestyle spending that today keeps most other advanced economies bubbling along.
On top of all this are typical Japanese worry-wart concerns over the future, even when times are good. None of these factors is likely to disappear soon.
What to do? Deregulated and new service industries might help create some new demand and investment. But don’t hold your breath waiting. Meanwhile Japan’s demand gap expands daily. The latest figures are frightening. Since reform mania hit Japan, worried individuals have added 20 trillion yen to bank deposits, while firms preferring to repay loans rather than risk new investments have added a net 20 million yen.
Lacking borrowers, banks have spent 30 trillion yen of those surplus funds buying government bonds, despite low interest rates. The pundits who warned us that large official deficits would cause a crisis-inducing flight from government bonds now have even more egg on their faces.
If individuals and firms don’t want to spend, then clearly the gap has to be filled by government spending, financed by more bond sales to soak up more surplus funds or by increased taxes. Needless to say, Tokyo wants to do the exact reverse. It wants to cut government spending, and embraces tax cuts which in Japan, unlike in the U.S., have only weak stimulatory effects.
Tokyo also tries to rely on monetary policy levers, which are useless when interest rates are already close to zero. Fiscal policy is now the only answer. A massive burst of extra spending — say 10 trillion yen to 20 trillion yen — into areas with high employment and flow-on effects is the only way this economy can be turned round.
The arguments against fiscal remedies range from the silly to the ridiculous: They lead to waste and corruption, we are told. Well, get rid of the waste and corruption. They were tried in the past and did not work, it is said. In fact, they worked very well before 1997, and in any case they were meant mainly as a much-needed prop, not as a stimulus, to the economy.
They will add to the official deficit, it is also claimed. True, the official deficit is high, but is still only half of the bloated 1.4 quadrillion yen total for personal financial assets. And so on.
Tokyo now says it is creating a special government agency with a 10 trillion yen-20 trillion yen budget to rescue and help reorganize worthwhile firms sent bankrupt by the planned bank purges. I have a better idea: Instead of spending the money after the firms collapse and deflation gets out of control, why not spend it beforehand?
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