Structural Reform: the Only Answer to the Revitalization of Japan
Toyoo GYOHTEN (President, Institute for International Monetary Affairs)
The world was stunned by the terrorist attacks in New York and Washington DC on September 11th, and the global economy seems to be standing still for the moment. This is especially a severe blow to the Japanese economy, which had already been in a seriously depressed condition even before this incident. As pessimism is rapidly prevailing in various sectors of the economy, we are hearing a stronger voice for the adoption of stimulus policy measures to keep the economy from slipping into negative growth with a deflationary spiral. More and more people, including some LDP members and many Keynesian economists, are demanding expansionary fiscal spending by issuing new government bonds beyond the 30 trillion yen limit set by the Koizumi administration. They are even saying that the current structural reform plan should be shelved, as least for now, to combat the current recession and deflation.
I think that it is wrong to put the current issue in the context of stimulus policy versus structural reform. This kind of "alternative" approach is a result of inability to grasp the real problem facing the Japanese economy in a comprehensive manner. We need to understand two important points regarding the depressed state of the Japanese economy.
First, Japan's recent economic downturn was primarily due to an adjustment in capital investments on a global scale, triggered by the U.S. economic slowdown that started last spring after the bursting of the so-called IT bubble. Then came the terrorist attacks, which have put the world economy on the verge of a severe recession with sharp declines in stock prices in all major countries without exception. Interest rate reductions in the U.S. and elsewhere have not yet yielded any positive effect on the economy. Japan's economic slowdown should be understood in this context; that is, it has been caused primarily by global factors and could not be stopped by domestic stimulus measures, which might only produce a harmful side-effect such as a larger budget deficit and a higher long-term interest rate.
Second, Japan's current economic problems are of the long-term nature, stemming from the delay in structural reform, where "reform" means restructuring of the systems of laws, regulations and various practices including tax and budgetary processes in order to eliminate the traditional dualistic structure of the nation's politics and economy. This was pointed out clearly by Keio University Professor Eisuke Sakakibara in his article published in the July issue of "Chuo-koron." Thus, due to this delay in structural reform, supply-demand imbalances in the current business cycle are being distorted and amplified. For example, the bad loan problem in Japan has been worsened by indecisiveness on the part of bank management and financial authorities, but such indecisiveness was made inevitable by the structural problem of borrowing industries as well as the weak earning capabilities of financial institutions.
Given these kinds of structural problems remaining in Japan, it would be counterproductive to adopt economic stimulus measures such as expansionary fiscal policy and credit easing monetary policy, which might well delay structural reform even further. We need to understand that improvements on the demand side are inseparable from those on the supply side, and that the current deflationary condition cannot be dealt with by short-term stimulus policies. In Japan, structural reform is the only answer to overcome economic problems that have been worsened by the slowdown in the world economy and the recent incident in the U.S.
One question about structural reform may be how to deal with its "pain," such as unemployment. The answer is to make the labor market more efficient and to offer better vocational training, as well as more unemployment insurance as a social safety net. Structural reform itself will help create more new business opportunities to absorb some of those unemployed in the old economy.
Another question is whether we can postpone structural reform further. If we do so, then we will only face another decade of stagnation. In that process, Japan would continue losing its economic vitality as well as its international stature, probably leading to an irreversible decline in the power of the nation.
Structural reform is necessary, since that is the only way Japan's productivity and competitiveness can be improved. The current reform agenda, including political party reform, early disposal of bad loans, a review of public works projects, local finance reform and restructuring of public corporations, are all correct and achievable. Some observers may still be skeptical, since very few reform efforts have been successful in the past. But the reform initiative this time is definitely different from that in the past, since we have finally found what needs to be reformed and how to achieve it, whereas there were no concrete agenda or achievable plans in the past. The recent incident in the U.S. and the resultant slowdown in the world economy are certainly affecting the Japanese economy negatively, but that has only increased the need and urgency to carry out reform plans for revitalization of the Japanese economy.