"Japanese Phoenix" by Richard Katz

Reviewed by Takahiro Miyao

Review:

It is nice to hear, especially from a "genuine" reformist like Richard Katz, that the Japanese economy would recover, although it might take ten more years. In this book, his message to Japan is loud and clear. Reform is the only option left for everyone, including "the vested interests" in Japan. It would bring back the kind of growth "that can smooth over conflicts of interests." So Katz argues that "Japan will reform and revive," just as Japan achieved an economic miracle after the war.

However, Katz tries to differentiate himself from many of the Koizumi reformists by criticizing the current policy priorities, which he calls a "tragically self-defeating economic strategy." Koizumi is putting too much emphasis on budget cuts instead of eliminating banks' bad loans, according to Katz, who would like to see the bad loan problem completely solved through a new capital injection into the banking system, even though that would mean increasing government spending.

Here, Katz sounds just like a recent team of Takenaka and Kimura, who are pushing the banking reform very hard for Japan's revival, at least over the long run. There is even a similarity in attacking their critics by making a simple distinction between structural reformists (including himself) and macroeconomists, and insisting that insufficient demand is not as important as inefficiency on the supply side to explain Japan's stagnation.

What is missing in Katz' argument as well as that of the Takenaka-Kimura team is the correct understanding and recognition of the seriousness of asset deflation that the Japanese economy has been going through for the last ten years. Losing the value of key assets, stocks and real estate, by more than ten trillion dollars within 10 years could destroy any economy, even the U.S. economy, considering the fact that that matches the size of GDP of the U.S. and twice the size of Japan's GDP. That has led to the deterioration of both the demand and supply sides of the economy, and both macroeconomists and reformists are only focusing on the results, not the cause, of this unprecedented development in the Japanese asset market.

In other words, Katz' diagnosis is not quite right, and his prescriptions, as fully articulated in this book, may be a necessary condition for Japan's revival in the long term, but certainly not a sufficient condition for Japan's economic recovery in the short term as well as in the medium term. He, just like many other observers of the Japanese economy, seems to dismiss the boom in the asset markets in the 1980s just as a "bubble," or "methods the Japan used to cover up, and offset, its structural flaws." In doing so, he fails to recognize the seriousness of asset deflation which followed the boom period, and its devastating effect on the short-run and medium-run performance of the Japanese economy. For the important distinction between short-term and medium-term factors on one hand and long-term factors on the other, see the following:
Takahiro Miyao "Japan's Economic Problems: Diagnosis and Prescriptions"
http://www.glocom.org/debates/20020517_miyao_japan/

Having said that, I strongly recommend this book to anyone who would like to have a full understanding of "genuine" reformists' position, whether one agrees or disagrees with it.

The following is a more supportive review of this book than this one.
www.foreignaffairs.org/20030101faessay10227/
richard-katz/japan-s-phoenix-economy.html

The Japanese translation of this book "Fushicho-no Nihon Keizai" is published by Toyo Keizai Shimpo-sha in December, 2002.