Recent Papers & Speeches

"Hashimoto's six reforms will fail"
Euro Japanese Journal, Volume IV Number 1, Spring/Summer 1997

The second Hashimoto cabinet, which took office in November last year, announced a program of "six reforms" as its basic policy, pledging to carry out structural changes in the economy, in finance, in banking, in public administration, in social security and in education.
I believe these "six reforms" are bound to fail-for two reasons: First, the macro-economic framework required to Implement them is lacking. Second, there Is no overall conceptual structure binding these reforms together, so that each of them remains separate from the other. Implementing one could well harm another.

I
Let me explain what I mean by my first point. A structural reform fundamental enough to change the course of history is bound to cause pain. On the one hand it opens up opportunities for new growth and development, but on the other hand, a number of existing enterprises and Industries will lose their raison d'etre. There will be frictional unemployment and structural unemployment, and equipment and land could be Idled. This is not only a great waste, but drags the economy down even further into stagnation. Successful structural reforms require macro-economic growth sufficient to absorb the pain.a,
The government's budget for fiscal 1997 shows no change from the wasteful traditional method of budget-compilation, as the authorization that is bound to create new structural deficits. There is no shift to a budget that encourages new Investment by the private sector. Not only does the new budget postpone reform of taxes on enterprises, it raises the tax burden on individual taxpayers by a whopping nine trillion yen through increases in the consumption tax, income tax, and social security tax.
The only result will be a short-term deflationary effect caused by an increased tax burden. There is absolutely no structural reform from the supply side
. Thus the Hashimoto government's "six reforms" lack the macro-economic framework to absorb the pain of reform, and reflect the fantasy that merely mouthing the magic word "reform" will be sufficient to pull the economy out of Its slump.

II
Now let me take up my second reason for the probable failure of Mr. Hashimoto's "six reforms." These reforms do not reinforce each other; in fact, they are mutually contradictory. Carrying out one reform hampers the other. In short, there is no overall policy concept binding the whole reform program together. The only dependence is on traditional vertical lines of bureaucratic control.
When the Hashimoto government talks of administrative reform, for one thing, it means splitting up the powerful Ministry of finance and creating a bloated new Monetary Inspection and Management Agency. Far from reducing government expenditures, this new agency Is likely to Increase them.
Nor Is there any unified policy concept harmonizing social security reform and fiscal reform. The aim of fiscal reform is to correct the imbalance between direct and indirect taxes in order to prepare for the ageing society of the 21st century. Then why does the government seek to pay for the costs of care, not by means of the consumption tax, but by care insurance fees, which are a form of direct taxes? Social security reform must be of a type that makes much greater use of the private sector. The official determination of the need for care my be made by a local government, but to provide the care itself, there should be far greater reliance on NPOs (Non-profit organizations) and other agencies in the private sector. A voucher system should be used to increase freedom of choice and to encourage competition.

III
Mr. Hashimoto's "five reforms" will probably face their first crisis in the first half o this fiscal year. The prelude can already be seen in the decline of stock prices and of the yen exchange rate that began at the end of last year. What this means is that the market has taken note of the government's fiscal 1997 budget and found there in the two reasons for failure of the reform program that I have mentioned. The market sees the new budget as contributing hardly anything to the cause of reform and even predicts that it will slow economic recovery in the first half of the fiscal year, thus leading to the collapse of the "six reforms."
From fiscal 1992 to fiscal 1994, growth was at the zero percent level. In 1995 and 1996, it reached the two percent level, but in 1997 it is likely to fall back to the one percent level. This means that the average growth rate from 1992 to 1997 was just 1.3%. In other words, the supply-demand gap has worsened by 1.7% each year, with the cumulative gap widening to 10%. Even if one assumes that 1991 was the final year of the so-called bubble economy, with a remaining Inflation gap of 2 to 3 %, the deflation gap of 1997 comes to 7 or 8%. The structural crisis of the Japanese economy arises almost entirely from this huge deflation gap.
This gap is the reason for the stubbornly high level of non-performing loans carried on the banking sector's books, despite all the efforts to write them off. This high level reflects the continued deterioration of the banking sector clients' performance and the continued fall of land prices.
The deflation gap is also a large part of the reason for the government's fiscal deficit, since it worsens both the performance and employment figures of the private sector, with a resulting decreasing tax receipts.
What I most fear is a monetary crisis. In the midst of rampant monetary fears, how will It be possible to carry out either a Big Bang or prompt corrective measures? Both the Big Bang and corrective measures will only increase the sense of Insecurity in the banking sector and lead to the collapse both of financial reform and the reform of monetary administration.

Thank you.

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