During an economic crisis, the necessary policy actions are clear and obvious.
As the last line of defense, governments and central banks do whatever it takes and inject capital in the markets. Governments will implement a bold fiscal policy, and central banks will significantly expand its funding.
That’s exactly what governments around the world have been doing, and the Japanese government is no exception. Under the Abe Cabinet, it issued additional government bonds to the order of ¥60 trillion — that is, more than 10% of GDP — along with the implementation of other policies. Despite having little room left to maneuver after years of unconventional monetary policies, the Bank of Japan has made it clear that it will work side by side with the government to prevent the economy from crashing.
There’s still no end in sight for the pandemic crisis, but as Japan’s economy averts a worst-case scenario and makes a modest recovery, how to revitalize its industries is becoming a major issue.
Recently, Prime Minister Yoshihide Suga has made organizational changes to pursue new policies. He repositioned the Council on Economic and Fiscal Policy and the Regulatory Reform Council at the “front and center” of the administration, and created the Growth Strategy Council to complement the two economic councils. Among these councils, industrial revitalization is considered to be a key issue going forward.
First, let’s check the facts. Due to the COVID-19 crisis, GDP growth for the second quarter was an astonishing -28.1%. And yet unexpectedly, bankruptcies have not increased that much. The government’s subsidies and banks’ emergency loans have helped companies cash flow situations. The labor market also appears to be relatively stable — the unemployment rate has risen from the nearly full employment status of 2.5% before the pandemic, but continues to remain low at 3.0%. This is in contrast to the U.S. unemployment rate, which at one point spiked to the 14% range.
On the other hand, although the bankruptcy-filing number is low, reportedly seven times as many firms have closed their businesses altogether. Several companies have given up on business continuity and left the market. Part of the reason may have to do with a lack of successors to take over the firms. Another cause of concern is that though not unemployed, there are as many furloughed workers as the unemployed, leading to the concern that the labor market could deteriorate at once if they are laid off.
Another area to look at is the rapid expansion of corporate debt. According to Finance Ministry statistics, corporate debt (long and short term loans and corporate bonds) has increased by ¥35 trillion, or about 7%, in just three months from the end of March to the end of June.
It’s a dramatic increase by any measure, especially considering that the debt increase was ¥136 trillion over the four years after the bubble economy collapsed. The banking sector has bad debts, and the corporate sector is approaching the point of excess debt. In other words, the Japanese industrial sector needs to start readjusting its balance sheet.
The situation reminds us of the stagnation of the post-bubble Japanese economy, which was saddled by its bad balance sheet and its inability to overcome debt overhang. Companies were unable to make forward-looking investments and banks were reluctant to lend, resulting in a significant deterioration in their financial capabilities.
This was resolved during the Koizumi administration, more than a decade after the end of the bubble economy. Japan must avert a repeat of this at all costs.
At that time, financial authorities played a key role as it forcefully pushed for the disposal of nonperforming loans in the banking sector. Equally important, however, was the creation of a new organization to advance the balance sheet adjustment of the industrial sector — the Industrial Revitalization Corporation of Japan. Depending on the circumstances, Japan might do well to consider creating a similar organization.
As corporate debt attracts increasing attention, equally important is the rapid increase of government debt.
The ratio of government debt to nominal GDP will climb to 125% in 2021 for all developed countries, surpassing postwar levels and reaching a record high.
Needless to say, the chief cause is the drastic public spending in response to the pandemic. In Japan as well, the scale of the general account for this year has expanded from the initial budget of ¥102 trillion to ¥160 trillion after the supplementary budget funded by additional government bonds. The Institute for Fiscal Studies in the United Kingdom estimates that Japan will have to face a significant tax increase down the road.
Of course, pushing for tax hikes during a downturn is a tall order. A more realistic approach would be to expand public spending and revitalize the economy, in the hopes that the growth would provide increased tax revenue.
To that end, it’s all the more important to pursue industrial revitalization making efficient use of public spending.
Heizo Takenaka, a professor emeritus at Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.
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