The Katz-Miyao Debate #2: Katz on Miyao

Richard Katz (The Oriental Economist Report)

This commentary originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 15, 2003: posted here with the author's permission.

Takahiro Miyao wrote (http://www.glocom.org/debates/20030519_miyao1/):
"You should recall how much Japan changed in the 1980s, when asset markets expanded rapidly."

You seem to view the 1980s bubble through rose-colored glasses. While you recall it as a time of vibrance, most analysts think it help set the stage for today's problems.

Miyao wrote:
"Of course, there may have been a little bit of bubble bursting,"

A little bit?

Miyao wrote:
"Richard Katz has turned out to be among those who in effect justify the good old "macroeconomic stimulus policy," which virtually means public spending in the traditional sense."

Au contraire, mon frere. I have always emphasized consumer-oriented tax cuts, not bridges to nowhere. That, together with continued monetary ease, would serve as a macroeconomic safety to make structural reforms economically and politically feasible.

Miyao wrote:
"All you need is tax cuts on stocks and real estate. Many reformers are saying that the Japanese government has wasted almost 100 trillion yen in the form of traditional public spending without stimulating the economy, and they are right in the sense that the government should have spent that amount of money on asset markets to solve the asset deflation problem. Then, the Japanese economy would probably have been right back to a healthy growth path with various reforms taking place in the market, as in the U.S. throughout the 1990s."

How would 100 trillion yen spent on price-keeping operations for stocks and buildings revive Japan's sagging productivity?

Your recipe sounds like a repeat of the 1980s bubble on an even grander scale. Surely, the BOJ could double the price of real estate overnight by promising to spend unlimited amounts of money to buy buildings at double their current prices. Not only would people then buy more buildings, they'd also build more just to sell to the BOJ. Even more than in the 1980s, prices and vacancy rates would increase in tandem. Until the day the BOJ stopped buying. Then prices and construction would collapse. Or, the BOJ could keep on buying until it owned every building in Japan. Hardly a recipe for "a healthy growth path."