Recent Papers & Speeches

For a Free, Fair, and Open Japan
Asian Wall Street Jounal, June 23, 1999, Vice Chairman of Policy Research Council, Liberal Party

On June 11, the government announced a package of measures designed to address the difficult unemployment environment brought about by the continued economic downturn and accelerated restructuring programs being carried on around the country, and another package aiming to increase industrial competitiveness.

These policies are a prudent and necessary step to help companies continue with the structural reform that is imperative to Japan's economic revival. They support the economy through stimulating aggregate demand, and encourage structural change. They also represent a mix of demand and supply side policies which the Liberal Party, led by Ichiro Ozawa, has continued to argue for, both before and after entering government.

The challenge Japan faces today is to bring about fundamental change in its economic, political, and bureaucratic structures. This process began in earnest with the establishment of the Obuchi Cabinet, and inauguration of the coalition government between the LDP and the Liberal Party. Policies such as the reorganization of the central ministries and agencies and abolition of bureaucratic participation in Diet proceedings, promise to reorder the ancien regime of excessive government intervention in the economy. This will shake the very foundations of the Japanese state, giving impetus to the drive to eradicate excessive bureaucratic intervention and regulation of the economy.

The Liberal Party has been a constant advocate for structural reform of the economy, and was instrumental in shifting the government position towards taking up the painful yet necessary reforms facing Japan. The agreement signed between LDP leader Keizo Obuchi and Liberal Party leader Ichiro Ozawa on November 19th 1998 which led to the coalition agreement, clearly spells out our commitment to structural reform, including far-reaching reform of the tax system, a range of deregulatory measures, and reform of parliamentary procedures.

The unprecedented unemployment figures being seen in Japan today represent not only a symptom of the structural problems ailing Japan, but are also a direct result of the start of the restructuring necessary for Japan to regain industrial competitiveness.

In the short-term, however, these structural reforms will have a deflationary effect, causing increased unemployment, reduced personal consumption levels, and falling capital investment. The shift to a more flexible labor market, in particular, will result in a tightening of the household purse strings, as Japanese workers have been used to a lifetime employment and corporate welfare system - of being protected, if you like, from opportunity as well as failure.

This lifetime employment system has now reached the end of its life cycle. The coming tectonic shift in labor relations has naturally fueled workers' fears about employment security. These fears are being exacerbated by the aging society, and the worries of today's generation of workers that they will not receive the pension benefits they have worked hard to provide for the elderly of today.

The consumption tax is the key to solving these problems. In the agreement signed between Mr. Obuchi and Mr. Ozawa on November 19th last year, the leaders agreed on their understanding that Japan is in the midst of a national crisis. Such circumstances call for a drastic response. The 9.3 trillion yen tax cut outlined by the coalition government offers part of this response. Given the gravity of the situation, however, we believe that further measures are needed. A temporary freezing, followed by gradual increase, of the consumption tax offers just the right spice to the policy mix to stimulate greater consumption, helping to provide an expansive macro-economic environment which counteracts deflationary pressures resulting from restructuring efforts.

This permanent reduction in direct taxes, and temporary decrease in indirect taxes, will give a massive boost to consumption and investment levels, helping to improve consumer sentiment and pump energy back into the economy. After remaining frozen for one year, the consumption tax would be raised annually by two percent, until it reaches six percent. This will cause capital investment and personal consumption to be front-loaded as people expect an increase in the consumption tax. It should be remembered however, that this policy is simply a temporary policy initiative designed to help counter Japan's economic woes.

One of the fundamental problems cooling consumer sentiment is the lack of people's trust in social security. Indeed, the Liberal Party has continued to argue that the future of social security reform is inextricably linked to the future vitality of the economy. That is why we argue that the consumption tax, once it starts to rise after temporary suspension, should be limited to use for elderly welfare, including basic pensions, medical treatment, and elderly care.

Rather than continuing to collect social security directly from the personal incomes of the working generation, the utilization of the consumption tax for these purposes will free people's concerns over aging, as well as helping to loosen savings being stored away for later life. It also represents a more equitable method of providing elderly care across income levels and generations.

It is certainly true that the level of fiscal deficit is a concern for Japan. However, carrying out supply side reforms without demand side transfusions of energy into the economy will severely affect consumption and capital investment levels, giving companies less room to maneuver as they struggle to implement restructuring plans. It is the responsibility of the government to provide a macro economic environment allowing companies which work to retool to be rewarded for their efforts. The hands-off approach to the demand side being advocated by some commentators simply risks pushing the economy over the edge and into economic slide once again, resulting in an increase, rather than decrease, in fiscal deficits. The level of the fiscal deficit will start to decline when the economy begins to recover, and structural reforms bring about a smaller public sector.

Japan is facing a period of change unprecedented in its post-war era. All sectors of the economy, including the public sector, are being forced to rethink and redefine their missions in order to survive and prosper in the future. The hallmarks of this new era will be minimal government intervention, a deregulated economy, equality of opportunity, and individual responsibility.

Politicians will play a critical role in bringing about this Heisei Revolution. We must continue to pursue an agenda for structural reform through deregulation, financial and tax reform, and decentralization. Our agenda aims for nothing less than a reorganization of the way in which the private, administrative, and political worlds interact with one another, and will lead Japan down the road to a free, fair, and open future.



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