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Japan needs path of reform that can revive its growth
By Heizo Takenaka |
September 10, 2010, Friday
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CHINA has now officially supplanted Japan as the world's second-largest economy.
The question for Japan is whether or not the country will continue to tumble down the list of the world's great economies, or whether its politicians will return to a path of reform that can revive growth.
In the 1980s, Japan's annual GDP growth averaged 4.5 percent; since the early 1990s, the economy has been virtually stagnant, averaging barely 1 percent annual growth.
In the 1990s, Japan's government, grossly misjudging the sources of the economy's difficulties, vastly increased government expenditures on public works, but ignored supply-side adjustments.
This policy created new vested interests, and thus a new political environment, as construction companies and other beneficiaries of government contracts began donating heavily to the ruling Liberal Democratic Party.
This kept the LDP's coffers brimming, but posed the risk of a serious financial crisis in the late 1990s. It was in these circumstances that Prime Minister Junichiro Koizumi took office in April 2001. Under Koizumi's leadership, insolvent banks were made whole again.
At the start of Koizumi's government, 8.4 percent of bank loans in Japan were non-performing. By the end of his tenure, the rate was down to 1.5 percent, restoring the country's potential for growth. Indeed, this was one reason why Japan was so little affected by the "Lehman Shock" that incited the global financial crisis.
But macroeconomic reform came to a screeching halt after Koizumi stepped down in 2006. A series of short-term prime ministers began a pattern of huge government outlays. Not surprisingly, the economy deteriorated.
Despite the parlous fiscal position, for now the market for Japanese government bonds (JGBs) remains stable.
But this is because government bonds are purchased mostly by domestic organizations and households. In other words, the government's negative saving is financed by the private sector's positive savings.
But that private-sector safety net of savings is fraying. Japanese households hold savings of about 1.1 trillion yen (US$13.18 billion) in net monetary assets. In about three years, however, the amount of JGBs will exceed the total assets of Japanese households.
Government debt will no longer be backed up by taxpayers' assets. Confidence in the JGB market will likely decline.
Moreover, as Japan's society ages, the household savings rate will decrease dramatically. This will make it difficult, if not impossible, for the domestic private sector to finance the budget deficit indefinitely.
Japan's new government, led by Prime Minister Naoto Kan, started discussing a consumption-tax hike to offset the growth in spending. But a consumption-tax hike is no panacea, particularly given the government's lack of a growth strategy.
Although a tax increase will undoubtedly be needed, it is the wrong priority at the moment - and could prove counter-productive if it causes the economy to decline dramatically.
(The author is Director of the Global Security Research Institute at Keio University, Tokyo. The views are his own. Shanghai Daily condensed the article. Copyright: Project Syndicate, 2010.www.project-syndicate.org)
The question for Japan is whether or not the country will continue to tumble down the list of the world's great economies, or whether its politicians will return to a path of reform that can revive growth.
In the 1980s, Japan's annual GDP growth averaged 4.5 percent; since the early 1990s, the economy has been virtually stagnant, averaging barely 1 percent annual growth.
In the 1990s, Japan's government, grossly misjudging the sources of the economy's difficulties, vastly increased government expenditures on public works, but ignored supply-side adjustments.
This policy created new vested interests, and thus a new political environment, as construction companies and other beneficiaries of government contracts began donating heavily to the ruling Liberal Democratic Party.
This kept the LDP's coffers brimming, but posed the risk of a serious financial crisis in the late 1990s. It was in these circumstances that Prime Minister Junichiro Koizumi took office in April 2001. Under Koizumi's leadership, insolvent banks were made whole again.
At the start of Koizumi's government, 8.4 percent of bank loans in Japan were non-performing. By the end of his tenure, the rate was down to 1.5 percent, restoring the country's potential for growth. Indeed, this was one reason why Japan was so little affected by the "Lehman Shock" that incited the global financial crisis.
But macroeconomic reform came to a screeching halt after Koizumi stepped down in 2006. A series of short-term prime ministers began a pattern of huge government outlays. Not surprisingly, the economy deteriorated.
Despite the parlous fiscal position, for now the market for Japanese government bonds (JGBs) remains stable.
But this is because government bonds are purchased mostly by domestic organizations and households. In other words, the government's negative saving is financed by the private sector's positive savings.
But that private-sector safety net of savings is fraying. Japanese households hold savings of about 1.1 trillion yen (US$13.18 billion) in net monetary assets. In about three years, however, the amount of JGBs will exceed the total assets of Japanese households.
Government debt will no longer be backed up by taxpayers' assets. Confidence in the JGB market will likely decline.
Moreover, as Japan's society ages, the household savings rate will decrease dramatically. This will make it difficult, if not impossible, for the domestic private sector to finance the budget deficit indefinitely.
Japan's new government, led by Prime Minister Naoto Kan, started discussing a consumption-tax hike to offset the growth in spending. But a consumption-tax hike is no panacea, particularly given the government's lack of a growth strategy.
Although a tax increase will undoubtedly be needed, it is the wrong priority at the moment - and could prove counter-productive if it causes the economy to decline dramatically.
(The author is Director of the Global Security Research Institute at Keio University, Tokyo. The views are his own. Shanghai Daily condensed the article. Copyright: Project Syndicate, 2010.www.project-syndicate.org)
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