No Magic Wand Needed for the Japanese Economy

Heizo TAKENAKA (Minister of Economic and Fiscal Policy and of Financial Services)

Expectations for Turbulence

Some people say that this coming year will probably see a turbulent economy, and that is likely to be the case. This is because structural reform should cause at least some change in the economy, although it will take 5 to 10 years to obtain the results of our reform effort. In that sense, we must anticipate some turbulence in the economy this year.

However, we do not have to be too pessimistic. According to the government forecast, Japan's real GDP growth will be 0.6% for fiscal year 2003. This appears to be too low a number, but we should not expect economic growth to be too high, as this coming fiscal year is an "intensive adjustment period" for structural reform.

About this time last year we announced that real GDP growth would be 0% as the government forecast for fiscal year 2002, and that was criticized as too optimistic, as the average real growth rate forecast by private think tanks was minus 0.4%. In reality, however, it seems that a 1% real growth rate will be achieved for fiscal year 2002, partly due to a higher than expected growth rate for the U.S. economy for the past year.

Reduction in Uncertainties

Our basic scenario for the coming year is one of gradual improvements in economic performance. However, the key word for this year will be "uncertainties." The biggest uncertainty is U.S. attacks against Iraq. Domestically, what could happen in the process of disposition of non-performing loans seems quite uncertain. This is why we forecast a relatively low growth rate for the coming fiscal year.

The budgetary process has drastically changed this past year. The details of next fiscal year's budget were set by December 23, and the budget was officially approved by the Cabinet on December 24, not carried over to January as used to be the case. This happened because we examined this fiscal year's supplementary budget and next fiscal year's budget together in a unified fashion. We thought that would be an effective way to conduct macroeconomic management.

This fiscal year's supplementary budget covers additional spending of 3 trillion yen for public works, employment and small business policy and safety net expansion. Furthermore, we have a temporary tax cut of about 2 trillion yen, and therefore a total of 5 trillion yen (about 1% of GDP) will be appropriated to offset a possible increase in social security taxes and other fees for the public for next fiscal year.

By adopting these policies we are trying our best to reduce the degree of uncertainty. Our task is to make the economy move in a way as close as possible to our basic scenario for next fiscal year.

Strategy, Soundness and Sincerity

Regarding the non-performing loan problem, we will help strengthen the banking system based on our "financial revival program." Since last October there have been signs of change for major banks in Japan. In fact, a number of banks have made new business plans public. Taking note of those changes, the government will carefully examine banks' proposed plans in terms of three "s," namely strategy, soundness and sincerity.

First, banks' proposed plans should be "strategic" and not cosmetic. They must be "sound," and those plans that simply use up precious funds are not acceptable. The plans should be "sincere" and should not misuse the lender's advantageous position to issue new shares. Those banks that have accepted public funds must fully administer their proposed management normalization plans with sincerity. Those plans should include their promise to increase loans for small businesses.

Japan's economic condition may still be labeled "unprecedented depression," but I would rather appreciate the fact that the economy has improved a little from the bottom in the post-bubble era. Of course, that is no consolation, and it is important to return to Japan's potential growth path of approximately 2-4 percent per year.

Magic Wand Syndrome

As a common rule for most economies, signs of economic recovery tend to appear first in the household sector followed by the corporate sector, igniting business investment. The expectation that corporate investment is to be recovered forms a basis for our scenario for the year 2003. Such an expectation has been reinforced by the government's action and will such as tax reforms and fiscal policy to keep the economy from getting worse.

However, we cannot overlook a rapid increase in the number of non-working Japanese, especially young people. This is mainly due to a shortage of job opportunities and a difficulty in entrepreneurship. Therefore, the government should emphasize and actively support "industrial excavation and redevelopment" to solve those problems.

A sociologist recently introduced the concept of "the magic wand syndrome," after the best-seller "Harry Potter." Indeed some people wish to see some magic in economic policy, just like a wand to make impossible things possible. However, we should realize that in reality there exists no magic wand for economic policy to solve the current economic problem overnight. We once chased the illusion of a magic wand and faced the bursting of the bubble, leading to declines in economic competitiveness.

What we should do instead is try to overcome our negative legacy as fast as possible to mend the damaged balance sheet of corporations and recover some balance of the government budget. If we try our best in this regard in the next couple of years, we should be able to accomplish so much that we would not even dream of a magic wand.

(The original Japanese article appeared in the February 17, 2003 issue of PRESIDENT; Not to be quoted or reproduced without written permission of GLOCOM Platform)