Yomiuri Newspaper's Prescription for the Japanese Economy
April 1998Prescriptions for the economy/ Drastic steps needed to revive economy
Is the Japanese economy destined to share the fate of the Titanic?
There is great concern about the economy, with some analysts comparing it to the doomed ship.
The economy, which had long enjoyed prosperity, has now embarked on an uncharted voyage in an ominous sea.
Bureaucrats, the people who should be handling Japan's biggest postwar crisis, have fallen silent in the aftermath of scandals involving government ministries and financial institutions. Politicians, who should be exercising leadership at this critical point, cannot bring themselves to go beyond stopgap measures.
We should not be too pessimistic, but unless some effective measures are taken, Japan will not only be unable to play a key role in solving Asia's economic crisis, it could even trigger worldwide economic chaos.
In the first of an eight-part series called "Prescriptions for the Economy," which starts today, we offer an outline of seven proposals that we think that the government should implement to resuscitate the economy.
By Junichi Hayakawa
Yomiuri Shimbun Business Editor
Japan is facing a barrage of criticism--and not the sort of criticism that a sovereign nation should have to face--from foreign countries. The New York Times, for instance, has commented that a paralyzed Japanese government was the primary cause of the Asian economic crisis.
Criticism can also heard at home. Whenever the government and the Liberal Democratic Party have come up with economic stimulus measures, selling pressure could be seen in the stock market, with market players disappointed by the package. The yen nosedived the moment Prime Minister Ryutaro Hashimoto announced large-scale tax cuts.
A sense of distrust is engulfing the economy. Companies and individuals are increasingly losing faith in the future. It is the "confidence crisis" first described by British economist John Maynard Keynes. Left untended, Japan might fall into a prolonged economic decline on the threshold of the 21st century.
The economy is deteriorating. In fiscal 1997, Japan recorded negative economic growth for the first time since the oil crisis 23 years ago.
According to a projection by the Organization for Economic Cooperation and Development, the nation's economy will continue to contract in fiscal 1998. For Japan, the 1990s will be a decade of zero growth.
Of particularly grave concern is the loss of domestic and foreign confidence in the economy. The government should present a plan as soon as possible to end the crisis and win back lost confidence and trust.
Further unrest in the financial system should be prevented in a resolutely. To restore order in the stock and currency markets, it is essential to strengthen the government's policymaking functions and political leadership and to create a strong government respected by the market.
Of course, short-term measures alone will not help overcome the crisis. Bold measures, including a far-reaching structural overhaul, are necessary to spark the economy back to life.
With that in mind, The Yomiuri Shimbun has come up with seven measures that we believe are necessary to revive the nation's economy.
First, the government has to change its priority from fiscal reconstruction to economic stimulation. It is as though Japan tumbled from the cliff of recession while climbing the slope to fiscal rehabilitation. What the nation must do now is begin crawling back up the cliff.
Hashimoto had announced a plan to revise the Fiscal Structural Reform Law to provide for major tax cuts. It is only natural that he made such a decision. Reluctance to change policies prioritizing fiscal reform will only aggravate problems, triggering a sharp reduction in tax revenues and making it difficult to carry out even fiscal reconstruction.
The Fiscal Structural Reform Law must be revised to allow the government flexibility in spending and suspend its obligation to meet yearly deficit-covering bond reduction targets. The government should also consider postponing the target year of fiscal 2003 for reducing fiscal deficits of the central and local governments below 3 percent of gross domestic product.
But fiscal reconstruction must not be abandoned. Giving up on fiscal reform will intensify concerns about the future and give dealers an opportunity to mount an assault on the currency and stock markets.
There is also a warning light flashing above the public pension program, now that we have a rapidly aging society and a declining birthrate.
The government should take this opportunity to present a "grand design" for fiscal policies, including those concerning the social security system.
Medium- and long-term perspectives are necessary for tax cuts. The government's "special" tax cuts are just temporary measures.
Japan's maximum combined rate for income and residence taxes is 65 percent--the highest among industrialized nations--and the lowest taxable limit is set at a high level as well. Japan's taxation is unfair to those in the medium and higher income brackets.
Those whose yearly income exceeds 7 million yen account for 20 percent of income earners, but they pay 60 percent of the total amount of taxes.
It is urgent that the system be revised so that people will not become increasingly tempted to dodge taxes or transfer money overseas.
The maximum combined rate for income and residential taxes should be lowered to about 50 percent. The correct course is to implement cuts while broadening the tax base, and we urge the government to do so.
Similarly, the effective corporate tax rate of about 46 percent, which is still high by international standards, should be further lowered to help companies recover strength.
Public works spending, supposedly a more effective economic stimulant than tax cuts, has been directed at wasteful and unnecessary projects because the government is influenced by lawmakers with vested interests.
The government should use its precious funds only for public works that will really buoy the economy and to lay the foundation for future economic development. These areas include telecommunications, advanced medicine and the development of future technologies. For example, the installation of fiber optics cables in schools is expected to increase the population of Internet users and create a huge demand for telecommunications.
To prevent a disaster, the government is studying various possibilities, one of which is the securitization of real estate taken as collateral for nonperforming loans.
The method was employed in the United States and became an effective tool for the U.S. financial sector to recover from its doldrums of the late 1980s.
To do this, the government must promptly introduce the necessary bills. An injection of public money should be considered to promote property transactions.
The Big Bang financial reforms and deregulation are not the almighty remedy.
To stimulate competition it is necessary to review long-standing practices, such as the "convoy system," in which all banks, strong and weak alike, are protected from collapse by the Finance Ministry. But it is also important to pay attention to the side effects of big changes.
Some institutions have stumbled when given a "death sentence" low grade by international credit rating agencies. It may be difficult for the country to overcome its crisis if even sound banks and corporations are at the mercy of such commercial ratings firms.
There are both winners and losers in a market economy.
A key to overcoming the current economic crisis is determination and action on the part of the government and ruling parties as well as the private sector, which is directly affected by government policies.
Until now, bureaucrats have formulated most of the policies. Now, they have been struck dumb and silent by intense public bureaucrat-bashing, and politicians have emerged in the spotlight to replace them as the main policymakers.
Yet some of them make irresponsible remarks here and there about the management of the country's economy, prompting market players to ridicule them or express disappointment in their judgment.
A typical example is the so-called price-keeping operations, in which public money is used to buy shares to maintain their prices. Such an operation, undertaken at the initiative of politicians, failed dismally last month, when many firms closed their books for fiscal 1997.
Politicians should not interfere with the market by making irresponsible comments. If the current ruling alliance, formed by the LDP with the Social Democratic Party and New Party Sakigake (Pioneers), is standing in the way of swift decision-making, the alliance should be terminated.
Hashimoto, more than anyone, must demonstrate leadership. So far, he has maintained a low profile, virtually disappearing in times of crisis. This has delayed the implementation of necessary measures.
The country does not need a wishy-washy prime minister.
To create an environment in which a prime minister can make prompt and appropriate decisions, it is necessary to empower the prime ministerial office and strengthen its functions.
The bureaucratic apparatus, which consists of policy experts, should be used more effectively, on the condition that their discretionary powers be limited and that more information be disclosed. Bashing of the Finance Ministry is no longer necessary.
Corporations should stop their excessive reliance on bureaucrats. In the United States and Europe, private companies do not blame their governments alone for a recession, as is the case in Japan.
The U.S. economy, once criticized by Japanese corporate executives for its decline, has made a robust recovery.
If Japan shows wisdom and determination, economic revival will become a reality, not just a dream.
Yomiuri Shimbun's 7 proposals
· Postpone the target date for reducing fiscal deficits.
· Permanently cut income and corporate taxes.
· Investment in social infrastructure, in the areas of information and telecommunications.
· Realize limits to the market economy.
· Make use of public funds to securitize real estate held as collateral.
· Bring an end to "faceless" prime ministers.
· Stop irresponsible verbal intervention by politicians.
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