The Katz-Miyao Debate #5: 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 17, 2003: posted here with the author's permission.

Takahiro Miyao wrote (http://www.glocom.org/debates/20030519_miyao3/index.html):
"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."

Richard Katz wrote (http://www.glocom.org/debates/20030519_katz4/):
"This is the same logic that has repeatedly led the MOF to support consumer tax hikes and oppose tax cuts. This is the logic that led to the 1997 consumption tax hike. We've seen the result."

Please be fair. I have proposed the elimination of all taxes on stocks and real estate as a better policy than general (consumption or income) tax cuts. The MOF would not accept either policy. Furthermore, with regard to policy relevance, the Koizumi government would more likely adopt tax cuts on stocks and real estate (as has partially been done) than general tax cuts.

Miyao wrote:
"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..."

Katz wrote:
"Please give us evidence for your assertion that, over the past decade or two, consumer spending has been determined more by housing prices than by disposable income."

Asset values are an important determinant of consumption spending, if you also take into account the following two things, as I have emphasized: (1) mortgage payments - over the past decade, the only age bracket that has increased consumption is that of ages from 65 or above, because they had already paid off all their debts and, therefore, declines in housing prices did not constrain their spending behavior as much as younger people who might be facing the risk of mortgage bankruptcies, according to government statistics in the 2001 While Paper on Economic and Fiscal Policy. (2) Income as a dependent variable - disposable income itself is largely dependent of asset values, as asset deflation has hit the corporate sector at least as severely as the household sector over the past decade.

In this connection, I would again like to ask other economists, especially Japanese economists to join this important debate, as the Koizumi cabinet has now decided to adopt a series of policy measures to boost stock prices, while yet another banking crisis seems to be happening in Japan. As I mentioned before, I think the government should look at the entire picture of asset deflation including stagnant real estate, rather than just focusing on stock prices.