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Fighting over a cure for Japan's
economy
By Gary LaMoshi
Prime
Minister Junichiro Koizumi's bold mantra of "no recovery
without structural reform" remains popular among Japan's
opinion makers. The policies of Koizumi and his economic
czar Heizo Takenaka are also much admired throughout the
English speaking world, from Washington officials to
Wall Street vulture fund managers to gaijin
journalists in Japan.
In these same influential
circles, award-winning economist Richard Koo is
yesterday's man. Koo preaches more government deficit
spending to save Japan's economy, even though a dozen
years of Liberal Democratic Party (LDP) fiscal stimulus
has failed to lift the country out of its malaise. "I
don't know who listens to him - I don't," one
(English-speaking) banker declared. A fund manager (also
English-speaking) described Koo as "fighting a pretty
well lone battle".
"I'm far from a lonely voice,"
Koo, the chief economist for Nomura Securities, asserts.
"Japan is split into two camps, Koo versus Takenaka.
Ninety percent of LDP politicians are in my camp. The
other 10 percent - 8 percent really - hold the steering
wheel." Koo believes a change of drivers is needed to
put Japan back on the right course.
He also
admits, "The English speaking world is in the
Koizumi-Takenaka camp. Americans love to talk about
structural reform for someone else. They're so
arrogant."
Koo, a US citizen born in Japan with
roots in Taiwan, adds, "American investment houses in
Japan want more of this structural reform we're seeing
now. If the economy stabilizes, then there's less
business for them."
In his 2001 book, Balance
Sheet Recession, newly translated into English (see review
), Koo maintains Japan's economic woes are the
result of corporations paying down debt, instead of
seeking profits, following the collapse of asset prices.
Instead of circulating savings - a steady 7 percent of
Japanese household income throughout the 1990s - through
borrowing, corporations are now net suppliers of funds
to the banking system to the tune of 20 trillion yen
(US$167 billion) per year, 4 percent of Japan's gross
domestic product (GDP). With that reversal of the normal
cash flow, the government must act as the borrower of
last resort to prevent a deflationary spiral, according
to Koo's analysis that provides a missing link in
economic thinking.
"From a theoretical point of
view, it's new. I am isolated in the economics
profession." And not for the first time: in the 1980s,
when Koo was an economist at the Federal Reserve Bank of
New York, Koo was a rare member of the profession who
believed in Ronald Reagan's supply-side reforms.
Koo is isolated as well from today's fashionable
opinion mainstream insisting Japan that undertake
structural reform, including forcing banks must dispose
of non-performing loans quickly, shutting down bad banks
and reducing its budget deficit, the largest in the
developed world. These policies, though desirable, miss
the point in today's situation, according to Koo. "I'm
one of the original advocates of structural reform, but
not in the middle of this macroeconomic emergency."
That people underestimate the emergency is a
tribute to the success of fiscal stimulus under previous
LDP administrations. "If you continue to avoid crisis,
then people get used to the situation and don't realize
how serious it is," Koo explains. "The government spent
140 trillion yen and people think it was useless.
Instead of praising policies that saved us from
depression, they're nitpicking."
Koo advocates
reforming the public works process with bonuses for
faster completion to simulate the urgency of wartime
spending that lifted the United States out of its
balance-sheet recession of the 1930s. He refuses to
speculate on whether Japan might try actually military
spending ("as a Chinese-American in Japan it's not my
place"), but North Korea's nuclear threats accelerated
the launch of a satellite surveillance program, and
recent LDP administrations suggest evolution toward more
military vigor. Economic stimulus would be an added
bonus, and perhaps a convenient cover.
Under
Koizumi, Koo and his ideas are shut out of high level
influence for the first time in several LDP
administrations. Along with his nemesis Takenaka, Koo
was an advisor to prime minister Ryutaro Hashimoto in
1997 when that government - following international
advice instead of Koo's - raised taxes and reduced
fiscal stimulus aiming to cut Japan's burgeoning
deficit.
With those changes, the economy
suffered five consecutive quarters of contraction. (The
concurrent regional economic crisis didn't help the
situation.) In a movement that became known as nihon
uri (dump Japan), the yen and stock market both
fell. "As asset prices fall, the balanced sheet problem
deepens," Koo notes sadly. The economic meltdown was so
hot that even American vulture funds ran for the exits.
Hashimoto had to backtrack, and soon to leave office,
but not before tax receipts fell and extra stimulus was
needed to reverse the downtrend, widening the budget gap
instead of narrowing it, extending the recession, and
deepening problems for both the economy and government
finances.
Koo fears a repeat of that scenario
under Koizumi. "Since Koizumi came on board, 150
trillion yen has been wiped off of the stock market
alone," Koo notes, "well over 200 trillion in assets
overall." And, as Koo's analysis predicted, the economy
has turned downward again.
Koo insists Koizumi's
concern over Japan's budget deficit is particularly
misplaced. "Right now, JGB [Japan government bond]
prices are the highest in history. Demand is
outstripping supply, since the only borrower in this
balance sheet recession is the government. The high JGB
price is the market's way of saying that the government
should borrow more." When corporate demand for loans
returns, higher interest rates will signal that it's
time for the government to cut its borrowing and its
fiscal stimulus spending, Koo says.
"Mr Takenaka
is a very good microeconomist, but he understands
nothing about macroeconomic issues." Koo contends that
repeatedly debating Takenaka in public forums over the
years has begun to make an impression. "I think Takenaka
is concerned about the issues I raise, but he can't
convince Koizumi.
"I've dealt with a lot of
politicians but none as stubborn as this guy," Koo,
sailing against prevailing public opinion, says without
a hint of irony. At this moment, he's the iconoclast who
looks more likely to be right.
(©2003 Asia Times
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