The Katz-Miyao Debate #1: Miyao on Katz
Takahiro MIYAO (Professor, GLOCOM)
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.
Now it is my turn to answer Richard Katz' question: "What particular reforms did asset deflation stall?" One might recall that in the past "lost decade" there have been at least three administrations that tried to push one kind of reform or another. They are Hosokawa, Hashimoto, and Koizumi. They have not succeeded in pushing reform themselves, because they showed no understanding of the relationship between reform and asset deflation. They thought that reform should be pushed by the government, while the problem of asset deflation should be left to the market to solve. On the contrary, the right answer is that reform should be left to the market, while asset deflation should be dealt with by the government. You should recall how much Japan changed in the 1980s, when asset markets expanded rapidly. More and more individuals were willing to invest in stocks to support not only blue-chip companies but also new start-up companies at that time. Booming the real estate market also helped small and individual companies take risk in starting up new venture. This was happening, while the role of banks was declining relative to direct financing in the rapidly growing securities market. I recall I myself proposed the creation of J-REIT in the mid-1980s when I returned from the U.S. to Japan, because that was the right time to do so. But all those desirable moves were suddenly stopped in the early 1990s, when the government and the Bank of Japan decided to squeeze credit and added more regulations and taxes on stocks and real estate. Of course, there may have been a little bit of bubble bursting, but asset deflation was largely created and later worsened by policy makers who did not understand the importance of healthy balance-sheets of economic players who willingly push themselves into reform processes.
Here, I would like to comment on Richard Katz' answer to Peter Tasker's question: "What specific reforms would override the malign effects of asset deflation and return the Japanese economy to a growth trajectory? " (See Peter Tasker: http://www.glocom.org/debates/20030515_tasker_further/) To this crucial question, Richard Katz answered the following way:
"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."
This answer must be a tremendous disappointment to many hard-core reformers. After criticizing Peter Tasker and me, 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. Peter Tasker and I are offering a better answer than that. Focusing on asset markets is more consistent with reform, because that would be more effective to deal with asset deflation, one of Japan's most serious "structural problems," while probably requiring less government money. For example, no general, expensive tax cuts are necessary. 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.
Let me put our debate in the right context. I don't think the battle line should be drawn between those who seeks reforms and those who advocate asset market policy. In fact, many of them are on the same side. Instead, the line should be drawn between those who seeks structural policies (including structural reforms and asset market policies) and those who talk about just macroeconomic stimulus (meaning public works and other government spending).
In this connection, I would like to invite more economists, especially Japanese economists, to this debates. When you join this debate, please identify yourself in terms of policy combination: (1) institutional reform only, (2) institutional reform and asset market policies, (3) institutional reform and macroeconomic stimulus, (4) just macroeconomic stimulus without reform, or (5) none of the above. I believe that Peter Tasker and I belong to the group (2), while Richard Katz sounds likein group (3). In my opinion, (2) is the right combination, while (3) is dangerously close to (4).