The Japanese have a saying — “sandome no shoujiki.” Roughly translated it means that “after getting it wrong twice you finally get it right the third time.”

Two previous Japanese administrations — Hashimoto (1996-98) and Koizumi (2001-06) — set out to revive the economy through promises to cut government borrowing and spending. Twice the result was disaster — an economy in tatters, ballooning official debt and an urgent need to increase government spending to stave off recession. Will the new Democratic Party of Japan (DPJ) administration finally get it right this time round?

Probably not. One admires its efforts to cut government waste, but in striving to restrict government spending, badly needed to revive the economy, it seems determined to repeat mistakes of the past.

The Japanese economy is like a dog chasing its tail. First someone notes the size of the official debt — put at around ¥800 trillion. To reduce the debt they urge cuts in government spending. But these spending cuts weaken domestic demand, the economy falters, tax revenues collapse, budget deficits increase, and the government has to borrow more to balance budgets. So instead of decreasing the debt they end up increasing it — by all of ¥200 trillion in the allegedly reformist Koizumi years. Clearly something drastic has to be done to break out of this vicious circle. They include:

• 1. Realize what some of us have been saying for years — that Japan’s chronic lack of domestic demand is not accidental. It is due at least in part to a cultural bias against the luxury or conspicuous spending taken for granted in most other advanced economies. One result is that accumulated personal financial assets total a staggering ¥1,400 trillion, with about half held in miserly cash or deposits (another rainy-day cultural quirk). Someone has to use those funds or else they remain dead money draining demand from the economy.

Meanwhile, the DPJ hopes to save things with a mere ¥7.1 trillion stimulus package (reluctantly increased to ¥7.2 trillion as a concession to New People’s Party leader Shizuka Kamei, minister of state for financial services, who wanted to break the economy’s deflationary spiral). Even Kamei’s request is a mere drop in Japan’s ocean of demand deficiency — which has been put at ¥35 trillion, or 7 percent of GDP, for the three months to September.

• 2. Realize also what others have been saying for years, namely that the debt problem is not as alarming as it seems. A good share of it is balanced by surplus funds in other areas of government. Much of the remainder comes from borrowing and using some of that dead money sitting in bank or post office deposits.

There is one simple proof that Japan does not have a genuine debt problem: All predictions over the years that excessive borrowing would cause inflation and force interest rates to go through the roof have failed. Instead, rates have fallen through the floor and deflation stalks the land.

• 3. Go one step further and realize that most economic thinking in Japan for close to two decades has been wrong. We now have a disastrous situation where tax revenues have fallen to less that ¥40 trillion while the government needs a budget of well over ¥90 trillion simply to keep things turning over. Yet, the pundits, mainly to be found in Keidanren and Japan’s leading economic newspaper, Nihon Keizai, push the discredited U.S. (and Koizumi) supply-sider, anti-Keynesian thinking that says Japan’s problems can somehow be overcome simply by more deregulation, entrepreneurship and innovation. None of these things can be done quickly. or can they be effective without strong demand from the economy.

• 4. What to do? Shock treatment should be the first move, with tens of trillions of yen pushed into the economy in a gigantic stimulus package. Once the economy starts moving again, tax revenues will grow and part of the debt problem will be solved. But if that is not enough, simply create the funds needed, as any government has the right to do if it throws off central bank shackles.

So far the world’s central banks have done little more than pour money into the private banks, which then use the funds to buy government debt. They are part of yet another vicious circle: Weak demand in the economy kills their desire to lend productively which further kills demand.

• 5. Do all that is needed to increase private demand. Even such seemingly trivial things as casinos and Disneyland should be welcome. An immediate immigration policy is also needed to stop the corroding demand-reducing influence of a declining population. As well, Japan should do much more to protect industries threatened by imports from countries like China with artificially depressed exchange rates.

• 6. If private demand is inadequate, then it is up to government to step into the breach. But where possible, concentrate the spending on areas that improve productivity and have strong employment and income multiplier effects, such as needed public works. A serious revamp of the tax system is also urgently needed, with much more emphasis on eliminating rampant tax avoidance, and on indirect taxes such as specific product and services taxes rather than the unpopular, cumbrous, demand-stifling consumption tax.

Meanwhile, the DPJ is busily trying to cut both public works and some indirect taxes such as gasoline surcharges and road tolls. The gloom deepens.

Gregory Clark is vice president of Akita International University. A Japanese translation of this article will appear on www.gregoryclark.net

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