The Katz-Miyao Debate #3: Miyao on Katz

Takahiro MIYAO (Professor, GLOCOM)

This comment originally appeared in the "Japan-U.S. Discussion Fourm" (http://lists.nbr.org/japanforum) on May 16, 2003: posted here with the author's permission.

Richard Katz wrote (http://www.glocom.org/debates/20030519_katz2/): "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."

It is so enjoyable and stimulating to renew the "Katz-Miyao" debate on asset deflation. Now our debate has been elevated to a higher level of analytical sophistication and policy relevance for the following reasons:

1) I have presented a multiple-equilibrium model of asset markets in the economy (as opposed to the traditional "bubble vs. normal" economy model), where the Japanese economy in the 1980 and the U.S. economy in the 1990s are in a higher level of equilibrium and the Japanese economy since 1990 has been trapped in a lower equilibrium (Therefore, a "big push" is needed to move the Japanese economy away from the lower equilibrium with the vicious circle of asset deflation to the higher equilibrium with increasing asset prices stimulating consumption and investment), and

2) The reform-minded Koizumi administration has admitted the seriousness of deflation (and probably that of asset deflation) and started to discuss what to do to push up stock prices in order to get out of the vicious circle of asset deflation (for that purpose, the government should also look at real estate prices), while resisting to increase government spending in the usual sense.

So I am reviewing the 1980s and the 1990s without any colored glasses, and asking others to get rid of their blue-colored glasses to see the Japanese economy for the last couple of decades.

Katz wrote:
"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."

I am also advocating "continued (or more aggressive) monetary ease" as a part of asset reflation policy. If, however, "consumer-oriented tax cuts" mean consumption tax cuts and/or income tax cuts, those are likely to be very expensive without stimulating consumption much, because such policies would ignore the seriousness of asset deflation. Without correcting their balance-sheets by boosting housing values or reducing the burden of mortgage payments, consumers are not going to spend a penny (or a yen) out of their income, but instead repaying their debt, just as typical Japanese corporations have been doing for the last decade.

My advice to reform-oriented analysts and policymakers: Make sure to study Japan's asset markets and balance-sheet problem to come up with a good understanding of the actual workings of the economy, so that a set of structural reforms and asset market policies (such as elimination of taxes on stocks and real estate) can be proposed and adopted without having to call for the traditional macroeconomic stimulus policy such as public investment and general (income or consumption) tax cuts.