Comment on Katz's Oped

Takahiro MIYAO (GLOCOM)

The following is a slightly modified version of Mr. Miyao's comment, originally posted in the Japan-U.S. Discussion Forum (http://lists.nbr.org/japanforum) on February 12th, 2002.

Richard Katz's oped in London Financial Times (http://lists.nbr.org/links/ft2-10-02.asp) is excellent in clearly pointing out the difference between Japan as a creditor nation and Argentina or Korea as a debtor nation and criticizing the recent alarmist articles on the Japanese economy. But I would not go along with his conclusion: "What Tokyo cannot do, however, is keep the insolvent borrowers afloat and still maintain economic growth. The bad borrowers create such excess capacity and deflationary pressures that healthier companies are unable to grow. In the end, Japan will act - once the pain of inaction surpasses the pain of action."

Here are my points: (1) It is possible to "keep insolvent borrowers afloat and still maintain economic growth," if the current deflationary trends are reversed. (2) In my view, deflationary pressures are not created by bad borrowers, but rather deflation has created so many bad borrowers as a result. Healthier companies are unable to grow, not because of the presence of bad borrowers (money and other resources are abundantly available, and "excess supply" is a result of insufficient demand), but because of asset deflation affecting their balance sheet directly and their business indirectly through stagnant consumption and investment. (3) I think that Japan will act to deal with deflation, because the Koizumi government has realized that deflation (especially, asset deflation) is the major cause for the current economic slump and their various reform plans could not be successfully carried out without solving the deflation problem. It is mainly a matter of policy analyses and priorities, rather than the pain of action/inaction. In fact, Economic Minister Takenaka and Finance Minister Shiokawa have recently stated that the government will adopt anti-deflationary measures, which are to be spelled out in detail at the Council on Economic and Fiscal Policy this week. (4) Finally, anti-deflationary measures, including injection of public funds into the banking system, more monetary easing (possibly inflation- targeting), and tax incentives for stocks and real estate, are not "bail-out," but a crucial step towards solution of the balance sheet problem (that itself is a structural problem) to revitalize the Japanese economy, which would be able to deal with various long-term structural problems including the government debt problem.