Like a parrot, Prime Minister Junichiro Koizumi has been repeating the same phrase: “There will be no economic growth without structural reform.” At last he is being forced to make a policy turnaround to implement a package of antideflation measures to stimulate domestic demand. The reversal has been prompted by global deflationary trends, uncertainties about war, the Nikkei average’s plunge below the 8,000 yen level on the Tokyo Stock Exchange and a further slowdown in consumer and business spending.
Koizumi’s recent appointments of officials at the Bank of Japan were intended to facilitate policy coordination between the government and the BOJ to fight deflation. Appointed as deputy BOJ governors were a former treasury vice minister and a Cabinet Office official, both advocates of easy money. The government hopes to have the new BOJ leadership implement drastic policies for monetary expansion.
Finance Minister Masajuro Shiokawa, asked recently by an opposition lawmaker at a Diet session whether he supported the theories of Irving Fisher or of Joseph Shumpeter, was unable to answer offhand. In any case, calls for an easy-money policy based on the theories of Fisher or John Maynard Keynes are taking political and bureaucratic circles by storm.
Structural reform originally was based on the idea of Shumpeter-style “creative destruction” to improve economic efficiency and establish an industrial structure with high productivity or high added-value. However, the idea has been drowned out by demands for quantitative expansion.
Koizumi’s reform agenda clearly neglected policy to create demand. He was obsessed with limiting government bond issues and with privatizing postal services and public highway-related corporations. The agenda lacked future vision and specific plans for reforming the national economy. Furthermore, Koizumi did not provide an outline for reforming the social security system, and companies and consumers were at a loss in making plans for the future. Naturally, capital investment and consumer spending remained sluggish.
Fighting today’s deflation is no easy task and cannot be solved with monetary policy alone. Basically, Japan is troubled by deflation because many Japanese companies have lost their competitive edge due to high costs amid major supply-and-demand changes in human and material resources since the end of the Cold War. Domination of markets by low-cost Chinese products is a prime example of this phenomenon. Furthermore, banks have lost their ability to adapt to drastic change in the global capital market during the information-technology revolution.
Since the mid-1980s, there has been talk of the breakdown or collapse of the Japanese system. The key to Japan’s economic revival is restructuring a troubled system. Demand-stimulating strategies should be aimed at selectively promoting policy for developing industries or companies with future potential, without harming the principles of structural reform. Why can’t the government promote such a balanced policy?
Past debates have involved a choice between either a policy to stimulate demand or one to increase supplies and put into effect antideflation policies, structural reform, and so forth. Once a policy was chosen, it was pushed to the end.
It is necessary for the BOJ to implement further quantitative monetary expansion, such as buying more company stocks. Nevertheless, efforts have increased to impose delaying measures that could burden banks and companies, such as revisions to the accounting system. If companies that should be withdrawing from the market are allowed to remain while debate continues on industry revival, there is no hope for Japan’s economic revitalization.
In the political and bureaucratic worlds, there are perceptions that anything and everything should be done to fight deflation. This reminds me of Prime Minister Keizo Obuchi’s administration, when policy favoring quantitative expansion at all costs led to delays in structural reform and to a series of unsolved structural crises.
Many economists call for price rises, but prices do not rise easily. It’s not simply a matter of easing monetary policy or increasing fiscal spending. Some experts say Japan should try to devaluate the yen. But in view of the present international environment — especially the links between the U.S. economy, the Iraqi crisis and oil-market uncertainties — there is little possibility that Japan’s unilateral moves will bring the intended results.
Peter Drucker, professor at the Claremont Graduate University, says in the preface to the Japanese-language version of his latest book, “The Next Society,” that everybody in Japan talks about the economy but that the biggest problem for Japan lies in the society.
Drucker, hale and hearty at 94, also says Japan owes its success in the past four or five decades to its social system, policy and practices, such as the “keiretsu” system — by which banks and companies are linked through financing and stock ownership — as well as lifelong employment, export strategies and cooperation between the government and the private sector. He also says many foreign experts believe that the social system, policy and practices are based on old traditions, but they were not in place when he first visited Japan in the 1950s. They were established in the 1960s, a drastic innovation for the time.
The above-mentioned structure worked until about 1990, but none of the systems works today, according to Drucker. In his opinion, a new system, policy and practices are needed.
How should Japan change? Perhaps, as Drucker says, the economy is unlikely to change unless society changes drastically. Changing society will require changing the educational and political systems and the consciousness of business executives, bureaucrats and white-collar workers.
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