Comments on Peter Tasker
Richard Katz (The Oriental Economist Report)
This comment originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 14, 2003: posted here with the author's permission.
In response to my question to Takaharo Miyao, "What particular reforms did asset deflation stall?"
Peter Tasker wrote (http://www.glocom.org/debates/20030515_tasker_further/):
"One answer would be the whole Big Bang project, announced by Hashimoto in 1998 and now dead in the water."
Sorry, Peter, but the "Big Bang" was never intended to make Japan's markets "free, fair and global." It was intended to let the banks, who were suffering a loss of markets, into new opportunities in securities and insurance. The same banks which presided over creation of the zombies would have dominated the capital markets if the plan had gone through as intended. Via the law of unintended consequences, it was the downturn of the economy has made the "Big Bang" far more consequential than its designers intended (though far less than they advertised). Examples include the buildup for foreign ownership of stocker, brokering, insurance, and Shinsei. If the Big Bang had been allowed to do its work, it would have helped. But protection of the zombies and an increase in financial socialism have more than offset any potential benefits. Chapter 14 of "Japanese Phoenix" is devoted to this topic.
"Another answer concerns the so-called zombies...At higher nominal interest rates banks would be heavily penalized for carrying bankrupt borrowers." If this were true, then why didn't the MOF and banks do more when inflation was above zero? The reality is that they engaged in just as much denial, delay and dithering in the early 1990s as later on.
"But I think the broader issue which Miyao-san is driving at is that there will be no reform in a depression."
Over the last decade, whenever the economy had bouts of seeming recovey, the LDP said, "We don't need reform. The economy is doing fine." Whenever the economy turned weaker, the LDP said, "We can't afford reform. The economy is too fragile." There is never a good time for reform in the eyes of the LDP. Deflation is a pretext not a cause. But certainly the long malaise of the economy has undermined faith in the current system by both elites and the public. Koizumi's ascension certifies that even though his actions don't live up to his promises.
"What specific reforms would override the malign effects of asset deflation and return the Japanese economy to a growth trajectory?"
It requires a comprehensive package of structural reforms (on both the supply-side and demand-side) combined with macro stimulus. Stimulus and reform should not be alternatives, but partners. Stimulus can be heroin or anesthesia. The LDP resistors offer heroin. Koizumi, in seeking to withdraw the heroin, also withholds the anesthesia.
You will have to show, for example, that the substantial rise in bankruptcies and unemployment of the past seven years are leading to more start-ups and faster revenue growth for incumbents.
The rise and bankruptcies and joblessness of the past seven years are not reforms, but the unraveling of the old regime. The old regime is unraveling while there is not yet a new regime ready to replace it. As the Russians say, Japan is sitting between two stools and that's pretty uncomfortable.