Comment on Peter Tasker "Time Up for Koizumi"

Takahiro MIYAO (Professor, GLOCOM)

This commentary originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on April 28, 2003: posted here with the author's permission.

In his commentary, "Time Up for Koizumi" (http://www.glocom.org/debates/20030421_tasker_time/), Peter Tasker wrote:

"In the aftermath of an unprecedented collapse in asset markets, the government chose to squeeze demand by slashing public works and hiking stealth taxes. Meanwhile monetary policy remained inconsistent and reactive and nothing was done to relieve a banking system being crushed by a Mount Fuji of bad debt. The result has been that the markets have gone into toxic shock. The Nikkei Index was already flat on its back when Koizumi walked into the prime minister’s office in April 2001. It has subsequently plunged another 45%, to levels not seen since Boy George was topping the charts and Leonid Brezhnev was in the Kremlin."

Let me revisit Mr. Tasker's point above from an economist's viewpoint. For me, and I am sure also for Mr. Tasker, it is disturbing to see that the Koizumi government recently rejected the demand by the three big business organizations for suspension of capital gains taxes on stocks without presenting any alternative measures to stop the catastrophic collapse in the stock market. Their excuse seems to be that discussing a possibility of reviewing taxes on stocks would have a negative impact on a new tax reform which is currently being implemented. They are wrong in many respects.

For one thing, the current situation in Japan's stock market demands immediate action on the part of the government, and that is in quite a different dimension from the annual review of the tax system. This government lacks the sense of urgency in dealing with the vicious circle of asset deflation, which cannot be corrected by just sticking to its long-term reform policies.

Second, it has become clear that the Koizumi government does not understand the seriousness of asset deflation in general, as it has not responded at all to the recent news that land values declined at a faster rate last year than the previous year, resulting in the worsening of asset deflation. There is no sign that the government would give any consideration to a reduction in capital gains taxes on real estate (still 26%, compared to 10% on stocks). Third, foreign investors are selling Japanese stocks, not only for increasing geopolitical and health risks in East Asia in general, but also for lack of the Koizumi government's initiative to deal with asset deflation, which is analogous to SARS in the sense that the Japanese government (the Chinese government in the case of SARS) downplays its seriousness in order to avoid the adoption of necessary measures that are unpopular within the government.

In any case, what needs to be done is quite clear. (1) The government and/or the Bank of Japan should set an asset-inflation target such as 20-30 percent increases in stock prices and 0-5 percent increases in land prices to be achieved within the next year or two; (2) the Bank of Japan should purchase ETF (Exchange Traded Funds) and REIT (Real Estate Investment Trust) to push up the prices of those trust funds closely related to stocks and real estate; (3) the government should suspend all capital gains taxes on stocks and real estate for the time being; and (4) the government should set aside public funds to purchase stocks and real estate, if necessary, to achieve its asset-inflation target.

These emergency measures to stop the vicious circle are perfectly compatible with long-term reform policies, which are supposed to push up the values of stocks and real estate in accordance with productivity growth in the long run, and those long-term objectives could be met only if the short/medium-term pitfalls such as the vicious circle of asset deflation were avoided by timely measures as suggested above. Otherwise, time would be up for the Koizumi government very soon.

For asset deflation, see my video on GLOCOM Platform: www.glocom.org
(http://www.glocom.org/special_topics/colloquium/
20030318_miyao_japanese)