Shuntaro SHISHIDO (Professor Emeritus, International University of Japan and University of Tukuba)
The comments of Ms. Noriko Hama are almost the same as Mr. Koizumi's views on the Japanese economy. Essentially, that it has long been suffering from a supply side illness. This position further argues that, although the economy has been showing strong impacts from the demand side over the past ten years, it has responded quite insignificantly leaving behind a huge outstanding fiscal debt. Macroeconomic policy is no longer effective because of many offsetting factors in the supply side that have long been neglected, although drastic structural reforms are needed. Ms. Hama emphasizes that the time seems to be ripe for a drastic operation, since the economy is in deflation and inefficient sectors are likely to be eliminated without strong frictions, that is if structural reforms are successfully implemented. Ultimately, after structural reforms are completed, the economy will likely start to recover vigorously.
Those views based on strong classic liberalism or market-fundamentalism tend to disregard serious social frictions stemming from radical structural reforms that sometimes offset their positive impacts. The increase in unemployment and the rising trend of heinous crimes, especially in recent months, are regarded as signals indicating increasing difficulties in the face of radical reforms while deflation grows. It should be stressed that a policy package of structural reforms and a macro economic policy for aggregate demand promotion are not competitive with each other, but rather complementary. Strong macroeconomic impacts usually help alleviate the negative effects of structural reforms by expanding employment opportunities and cooling inflationary pressures in an expanding economy. In the framework of contemporary economics, unlike the classical approach, a narrowing deflationary GDP gap should be strongly supported by strengthening structural reforms and market competition in order to maintain price stability.
Finally, regarding my Big Push Scenario, I like to make an additional remark, which was not specifically described in my paper. Several positive factors resulting from anticipated structural reforms are already assumed in this scenario, such as a drastic tax cut and financial measures to promote residential investment amounting to about 4 trillion yen annually, and a huge policy package to promote business investment for IT and related sectors estimated between to 4 to 10 trillion yen annually after 2003.
In this context, according to the analysis of our model, fiscal stimuli measures undertaken during the 1990s, which were criticized because of their insignificance, did contribute to Japan's economic growth. Were it not for such a fiscal policy of the government, the present Japanese deflationary spiral would have deteriorated more. Also it should be emphasized that the present government debt/GDP ratio, though widely known as the highest among industrial countries, is not that high if the ratio is adjusted on a net basis. The Japanese government owns huge financial assets for social insurance that have contributed greatly to absorb growing government bonds. The net rate was 0.436 for Japan, and 0.432 for the average OECD country in 2000. Furthermore, Japan's gross national saving ratio is still extremely high, at around 30% in recent years well above the average OECD of 20%. Furthermore, an excessive saving over investment or current account surplus stands annually at a high 3% of GDP. These three facts clearly imply that there is still plenty of room for national bond issuance without fear of inflation and the crowding out of long-term interest rates.
Macroeconomic policy, especially accommodating fiscal policy, can be compared to 'sun shine' policy, while structural reforms to 'north wind' policy. For the successful implementation of the two we need a close collaboration of both policy packages, especially in our Big Push Scenario.