Evaluation of the "Comprehensive Anti-Deflation Package"
Takahiro MIYAO (Professor, GLOCOM)
This commentary originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on November 5, 2002: posted here with the author's permission.
It seems that most of the views of foreign journalists and analysts on the recent "anti-deflation policy package" may be characterized by such newspaper headlines as "Koizumi's package 'too little, too late'," "Japan's 'zombie' businesses live on," "Maybe Japan just isn't ready for change," etc. In my view, they are essentially wrong in this case and do not seem to fully understand the real cause of Japan's economic problem. In fact, very few journalists and analysts, whether Japanese or foreign, have pointed out that the government's anti-deflation policy package is completely wrong in its direction, and Koizumi's "reform" in this case might well ruin the Japanese economy. The following is my analysis and policy recommendations, which are just opposite to the policy priority set by Koizumi and Takenaka.
The recently announced anti-deflation policy package seems to be chasing two rabbits, one is the cleanup of bad loans and the other is the reversal of deflationary trends, and will likely end up catching neither. The government is going in the wrong direction by giving its top priority to the accelerated disposition of bad loans, which would surely worsen the deflationary trends, especially, in the stock and real estate markets, leading to more new bad loans. On the other hand, the package includes no concrete measures to turn asset prices around or increase effective demand, which would be necessary to deal with asset deflation in particular and price deflation in general. The important point is the (wrong) direction and not its speed.
Then, what to do? There is a policy that can kill two birds with one stone. Turn the Koizumi-Takenaka approach around completely by giving top priority to "anti-asset deflation policy" such as elimination of taxes on stocks and real estate, along with the Bank of Japan adopting "asset price inflation targeting." If land prices stop declining and stock prices start climbing, then many of the "bad" loans would become "good," and many of the "zombie" businesses might well be "reborn." This way, two birds can be hit with one stone: deflation would stop and bad loans would be reduced if not eliminated. After things turn for the better, then the Koizumi-Tanekana package, or at least part of it, could be applied to kill those two birds completely. Otherwise, it might well kill the Japanese economy itself (some of the foreign "vultures" like it!).
It seems that this "anti-asset deflation policy approach" is getting more attention and gaining more support than ever, not only among economists, but also among influential politicians. This is an approach to reverse the wrong trend that has been weakening the very basic structure of the Japanese economy and society for the "lost" decade. In that sense, this is the most important structural policy that the government must adopt. It looks like a matter of time before Koizumi and Takenaka listen to this view seriously and make a hard decision whether they should surrender or subscribe to this approach after finding out that they fail to catch anything.
For the past discussion on this issue, see the following:
Takahiro Miyao "Debate on Deflation in Japan: Moderator's Summary and Comments"
Takahiro Miyao "Japan's Economic Problems: Diagnosis and Prescriptions"
Takahiro Miyao "Current Confusion in Japan's Economic Policy"