Noriko HAMA (Research Director, Mitsubishi Research Institute)
Let the Big Squeeze Begin
Shuntaro Shishido's paper on the policy options open to Japan at present is a welcome contribution to this very important and topical debate. As Professor Shishido correctly points out, the popularity of Koizumi the Lion Heart (well, Lion Hair, actually) is a reflection of how totally fed up the Japanese public had become with the status quo in politics and policy making in this country. Something new needs to happen.
Indeed nothing short of a total departure from what worked for Japan in the past will suffice if Japan is to start working again in a manner which befits the future that lies ahead of it. In this context, I beg to differ on Professor Shishido's "Big Push" proposal. The Shishido paper argues that the economy has to be boosted out of the deflationary spiral before it can be properly fixed. This stands the argument on its head. The economy can only find its way out of the deflationary spiral if it is properly fixed. True, a big push may get growth going for a while. Yet if all the old ways of doing things are allowed to remain intact, the effect of the push will be temporary at best, and at worst would work to further exacerbate Japan's economic woes.
Old habits die hard and old sins cast long shadows. Neither should be allowed to reassert themselves at this juncture. And reassert themselves they will, if demand-boosting measures of the scale proposed are put in place before they are thoroughly exorcised. The competitive forces needed to squeeze out the prevalent excesses and inefficiencies will not function so long as the economic pie is made to expand at a pace that creates room for even the most uncompetitive to remain in business. The hard choices will only too easily be discarded in a climate of accommodation. Not because people and companies are weak or lazy or stupid, but because of the way the system has been designed to work. Boost demand, and it will not be the fittest who will get the greatest portion of the pie. It will be share and share alike, with overall efficiency suffering as a result.
In this respect, it is not so much a big push as a big squeeze on the non-competitive elements within the econo-social system that is needed to remedy the ills of today. Professor Shishido is totally justified in pointing out that a deflationary spiral is a self-feating process. The critical difficulty with the current situation is that in stemming that process through demand creation, what Japan and its policy makers will be doing is to set the stage for the next deflationary spiral, which has every possibility of being even worse than its predecessor.