Comments on the Debate over Koizumi's Economic Policy

Ashwini Lakshmanan (University of Southern California, USA)

Junichiro Koizumi's rise to the position of Japan's prime minister this April was an event that has inspired the public to believe that their weak economy can finally be reversed. Koizumi's personal character and iron will devoted to political reform have prompted international and more importantly domestic consensus in acknowledging the need for radical policy, specifically "structural reform."

Labeled as neo-liberal and Reagan-Thatcherite, however, his planned course of action has been questioned particularly for its proposed efficacy amidst deflation in Japan. Critics of Koizumi's policies such as Professor Shishido suggest that a deflationary spiral is a self accelerating process once started and instead put forward the idea of a "big push" scenario which would place more emphasis on housing investment and IT related business investments. However, a research director at the Mitsubishi Research Institute, Noriko Hama points out that a "big push" scenario is only a temporary solution and may improve growth only in the short term, as has been the case in the last decade.

I agree with Hama and believe that the Koizumi administration can rescue the Japanese economy by refuting Keynesian policies such as Shishido's "big push" scenario and instead combining structural reform with a bolder monetarist policy. For example, Koizumi might consider franchising the Postal Savings System, a political machinery which has attracted too much savings, to make it a true financial intermediary with higher returns on investments. If, furthermore, Koizumi spurs the Bank of Japan to move directly to purchase Japanese government bonds or foreign exchange, it could "signal to markets its intention to end deflation and push up prices."(Makin, John H. "Japan Needs a Current Account Deficit." http://www.aei.org/eo/eo13010.htm)

Koizumi might be able to prove that a bolder policy mix of deregulation and monetary policy, not Keynesian policies, could turn the Japanese economy around, just as Margaret Thatcher attempted to do in the UK during the 1980s.