As Japanese and global policymakers are rushing to design policies to counter the looming economic depression, advice from one of my favorite economists, Jean-Baptiste Say, comes to mind. In 1803 he wrote: “In policy as well as in morality, the grand secret is not to constrain the actions, but to awaken the inclinations of mankind.”
By that measure, the move from “keep calm and carry on” toward “don’t panic, but lockdown” is clearly insufficient to get us to a better place. We will need to get to “here’s a vision, so let’s get going.” With a little luck and determination, Japan may lead the way.
Good policy cushions the blow of an economic shock. Great policy accelerates long-needed structural change. So far in the response cycle, Japanese policy leaders stand out as best-in-class on the former, the counter-cyclical side. The speed, the size and the coordination of the macroeconomic resources mobilized so far is impressive. From here, the key question is not whether more is needed, but how to boost the administrative efficiency of implementation.
The faster the newfound macro initiatives get democratized and flow through to the millions of small enterprises, the better it will be for all. This is true not just from an economy stabilization perspective, but also from a future social stability one. If this pandemic widens further, the gap between the big-but-few versus the small-but-plenty, the legitimacy of Japan’s leadership may become its next victim. The pressure on Prime Minister Shinzo Abe is real.
To wit, there is no question that Japan’s macropolicy so far has favored large and listed companies. They directly and immediately benefit from the Bank of Japan buying more of their equity, more of their commercial paper and more of their bonds. Also, the large and listed companies have record cash reserves and defacto no problem securing new credit lines when needed.
In contrast, small nonlisted companies have no direct capital support from the central bank, and typically have a cash cushion of just about three weeks; and yes, approximately three out of four Japanese employees work for these nonlisted small enterprises.
By the end of April, many of the small enterprises will run out of cash and not be able to make payroll, rent or any of their liabilities. They will have no choice but to default on the countless trust-based supplier-vendor-customer-employee-financier relationships that are the lifeblood of any enterprise.
Obviously, a lockdown of the major cities would turbocharge this depression cycle unless the government can dramatically shorten the time it takes from filing an emergency relief loan application to actually receiving the funds. We need to get this down to days rather than the two or three months it typically takes in the best of circumstances under most current procedures.
How about this for a concrete policy goal: Make small company emergency relief fund applications and the consequent fund-flows as easy and swift as it is to sign up for Line, Rakuten, Netflix or Amazon?
Which gets us to “great policy accelerates long-needed structural change” and “here is a vision.” The digitalization and streamlining of administrative procedures is a mega-trend. The current crisis is a golden opportunity to embrace it, particularly for the public sector. A lasting legacy of this crisis will be people demanding better, more efficient, more targeted and more accountable support from the administrative state.
If Japan would make a strong and urgent push toward e-government with an immediate focus on small companies, it could set a very positive example for other democratically elected governments to follow. Build up e-government to empower and support small companies, rather than constrain people’s freedom and invade their privacy.
“Democratizing” policy support for the corporate sector is one urgent but concrete opportunity. Another one is offered by the household sector. Here, the principal mega-trend to embrace and accelerate will be the developing tsunami of inter-generational wealth transfer. Offering a tax holiday for financial gifts to children and grandchildren could quickly lift the spirits and economic well-being of Japan’s younger generations.
Yes, the Japanese household sector is rich. Its total financial assets came to more than three times annual GDP, at a little more than ¥1.9 quadrillion (according to the BOJ at the end of last year). However, approximately 70 percent of these savings is owned by people over the age of 65. As they pass on, this enormous stock of savings will become unlocked. It will happen anyway, so why not bring forward the timing to make it happen in times of economic need?
Of course, any policy push to speed up the inter-generational wealth transfer immediately sets off alarms, not just among the tax and budget authorities (they want the inheritance tax revenues), but more profoundly from powerful economic fundamentalists. They essentially argue that money inherited is not money earned, and more importantly, that a good and fair social and political economy can only be sustained on money earned, while it inevitably must fail if based on money inherited.
Personally, I have no axe to grind here, except that in today’s world this is obviously a “false choice”: A tax system that will ensure inherited money goes to productive and income earning use can easily be devised.
Specifically, the reduced gift tax will only be applied if the recipient starts a business, uses the funds to hire new employees or pays higher wages, or makes new investments for his/her business. In other words, let’s use tax incentives to turn the old and wealthy into angel investors for the entrepreneurial dreams of their children and grandchildren. (Given that the average age of people receiving inheritance is just above 60, the scheme should probably be applied disproportionately to grandchildren.)
Freeing up “mattress money” and turning it into seed funding for the young would not just help awaken the aspirations of the next generation of Japanese; it would also almost certainly raise the overall tax revenue collection. Under the current system, Japan is expecting to pay down government debt with private assets, which is a zero-sum game for national income; turning private assets into enterprises and job creators is, well, exactly how economies grow and national income prospers.
The current crisis can become a catalyst for more forward-looking and inspired policy-making. Upgrading the administrative state to enable more democratized corporate support and turning the old generations’ mattress money into seed funding for new enterprise may be insufficient to prevent an imminent depression, but, with a little luck, may help inspire visions for a brighter future. True leaders must look beyond the current needs and place big bets on accelerating the real deep trends to achieve future prosperity.
Jesper Koll is senior adviser of WisdomTree Investments and is consistently ranked as a top Japan strategist/economist. He publishes blogs at www.wisdomtree.com/blog.
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