Recent Papers & Speeches

Japan's Economy today
at AEI World Forum, June 25-28, 1998, Beaver Creek, Colorado, U.S.A.

There are three main reasons for the weakness of the Japanese economy since 1992:

@First, with the bad loan problems resulting from the bursting of "asset bubbles" still unresolved, the huge impact of consequent wealth reductions remains an issue, and a balance-sheet recession continues.

@Second, the Japanese "catching-up" system, in which a strong central government with wide powers of regulation and discretionary intervention played an important role during the high-growth period, is still in place, and hampers rather than stimulates market-oriented development.

@Third, the extraordinary deflationary budget for fiscal 1997, with the 9 trillion yen increase in taxation and the social security contributions and the 3 trillion yen cut in public construction, resulted in a reduction in real growth from 3.2% in the 1996 fiscal year to negative 0.7% in fiscal year 1997. In addition, the Fiscal Consolidation Law, which set reducing fiscal deficits as a primary target for economic policies until 2005, reduced expectations for economic growth.

Given that Japan's growth rate reached 3.9% in calendar year 1996, the Japanese economy would have recovered despite the first two problems, if it had not been for this deflationary budget and the Fiscal Consolidation Law.

The measures taken, or being taken, by the government in response to these points are three:

First, a new framework for prompt resolution of bad loans is under discussion and the related new laws will be presented to the new session of the Diet, from late July.

Second, deregulation - including the "Big Bang" - is steadily proceeding.

Third, a new "elasticity article" was added to the Fiscal Consolidation Law. This has allowed the government to introduce a supplementary budget of 6 trillion yen for fiscal 1998.

However, I am still concerned about the policy stance of the Hashimoto cabinet with its adherence to fiscal consolidation as a primary goal. According to the new "elasticity article", an increase in the public sector deficit is allowed only when the growth rate is under 1% in two consecutive quarters. This suggests that strict fiscal consolidation will be reapplied once economic growth exceeds 1%. In Japan, however, 1% growth, in effect, means recession. A "stop-and-go" policy based on the "elasticity article" will result in medium-term growth of around 1%. This is still a recession. Such stagnation will hinder the early solution of the bad loan problem and the prompt implementation of deregulation, since measures in these areas are always accompanied by a deflationary impact in the short term. In my view, the Fiscal Consolidation Law should be abolished and Japan should concentrate on economic recovery. Given Japan's high savings ratio, it is quite natural to have a public sector deficit equivalent to a certain percentage of GDP. The ratio of the government debt to GDP in Japan is the lowest among the G7 countries when government financial assets are taken into account.

Politically, it would not be easy for the Hashimoto cabinet to abolish the Fiscal Consolidation Law because the Cabinet presented that law and pushed it through the Diet only seven months ago, although all the opposition parties were strongly opposed to the measure.

This is one of the issues for the coming July 12 election for the Upper House. The reaction of Japanese voters will decide what happens next in the Diet and with the economic strategy.



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