A bet­ter eco­nomic plan for Ja­pan

Financial Mirror (Cyprus) - - FRONT PAGE -

It’s been a quar­ter-cen­tury since Ja­pan’s as­set bub­ble burst – and a quar­ter-cen­tury of malaise as one “lost decade” has fol­lowed an­other.

Some of the crit­i­cism of its eco­nomic poli­cies is un­war­ranted. Growth is not an ob­jec­tive in it­self; we should be con­cerned with stan­dards of liv­ing. Ja­pan is ahead of the curve in curb­ing pop­u­la­tion growth, and pro­duc­tiv­ity has been in­creas­ing. Growth in out­put per work­ing-age per­son, es­pe­cially since 2008, has been higher than in the United States, and much higher than in Europe.

Still, the Ja­panese be­lieve they can do bet­ter. I agree. Ja­pan has prob­lems on both the sup­ply and the de­mand side, and in both the real econ­omy and fi­nance. To ad­dress them, it needs an eco­nomic pro­gram that is more likely to work than the mea­sures pol­i­cy­mak­ers have re­cently adopted – and which have failed to achieve their in­fla­tion tar­get, re­store con­fi­dence, or boost growth to the level de­sired.

For starters, a large car­bon tax, if ac­com­pa­nied by “green fi­nance,” would stim­u­late enor­mous in­vest­ment to retro­fit the econ­omy. Al­most surely, this stim­u­lus would ex­ceed the con­trac­tionary ef­fect of money be­ing taken out of the sys­tem and the neg­a­tive wealth ef­fect of the de­creased value of “car­bon as­sets.” The ad­verse wealth ef­fect from the de­crease in the value of car­bon as­sets would be small; and, with the cap­i­tal stock badly out of sync with the new price sys­tem, the in­vest­ment un­leashed would be large, un­less there were bot­tle­necks in clos­ing the gap.

In that case, the money gen­er­ated by the tax could be used to re­duce govern­ment debt; other­wise, it could be used to fi­nance in­vest­ments in tech­nol­ogy and ed­u­ca­tion – in­clud­ing sup­ply-side mea­sures to im­prove the pro­duc­tiv­ity of Ja­pan’s ser­vice sec­tor. These ex­pen­di­tures could si­mul­ta­ne­ously stim­u­late the econ­omy in ways that would fi­nally pull it out of de­fla­tion.

Many out­siders worry about Ja­pan’s debt, which is easy to ser­vice at the low in­ter­est rates pre­vail­ing to­day, but would not be if rates in­creased to more nor­mal lev­els. While I don’t see that hap­pen­ing any­time soon, Ja­pan could un­der­take two poli­cies to in­oc­u­late it­self against such con­cerns.

First, it could ex­change some of its debt for per­pe­tu­ities, bonds that are never re­paid, but pay a (small) in­ter­est rate each year. This would shift the risk en­tirely off the govern­ment’s books. Some might worry that this would be in­fla­tion­ary; but in Ja­pan’s up­side-down econ­omy, in­fla­tion is ex­actly what’s needed. I be­lieve wor­ries about a sud­den in­crease in in­ter­est rates are greatly overblown; but, out of an abun­dance of cau­tion, the govern­ment could ex­change say 5% of its debt every year, un­less and un­til ex­ces­sive in­fla­tion­ary pres­sures ap­peared.

Al­ter­na­tively, the govern­ment could ex­change the debt for non­in­ter­est bear­ing money – the long-feared mon­eti­sa­tion of govern­ment debt. Even if mon­e­tary fi­nance was more likely to boost in­fla­tion than the ex­change of debt for in­ter­est-bear­ing per­pe­tu­ities, this is hardly an ar­gu­ment against it: it is only an ar­gu­ment for go­ing more slowly.

The sec­ond way Ja­pan could pro­tect it­self from an in­ter­est-rate spike starts from the recog­ni­tion that a large share of the money the govern­ment owes it owes to it­self. Many on Wall Street don’t seem to un­der­stand that what mat­ters is the net debt – what the govern­ment owes to the rest of so­ci­ety. If the govern­ment re­paid the money it owes to it­self – net­ting it out, in ef­fect – no one would know the dif­fer­ence. But those on Wall Street who look only at the head­line debt-to-GDP ra­tio would sud­denly feel bet­ter about Ja­pan.

If after all of this, there is still ev­i­dence of a lack of de­mand, the govern­ment could re­duce its con­sumer taxes, in­crease in­vest­ment tax cred­its, ex­pand pro­grammes to help low- and mid­dle-in­come house­holds, or in­vest more in tech­nol­ogy and ed­u­ca­tion, fi­nanc­ing all of this by is­su­ing money.

Again, old eco­nomics would worry about in­fla­tion; but Ja­pan wants those “fears” to come true.

Ja­pan does have more than a de­mand-side prob­lem. Data on out­put per hour worked sug­gest a sup­ply-side prob­lem, most clearly man­i­fested in the ser­vice sec­tor, where the im­pres­sive in­ge­nu­ity seen in so many man­u­fac­tur­ing in­dus­tries typ­i­cally is nowhere in ev­i­dence. A nat­u­ral niche for Ja­pan would be tech­nol­ogy de­vel­op­ments in the ser­vice sec­tor – such as the de­vel­op­ment of di­ag­nos­tic in­stru­ments in the health-care in­dus­try.

Prime Min­is­ter Shinzo Abe, how­ever, has taken a very dif­fer­ent ap­proach, sup­port­ing the Trans-Pa­cific Part­ner­ship trade deal with the US and ten other Pa­cific Rim coun­tries. Abe be­lieves that the TPP would force needed re­forms in do­mes­tic agri­cul­ture (though, in­ter­est­ingly, no one in the US thinks it would help the US move away from its highly dis­tor­tionary agri­cul­tural poli­cies). In fact, such re­forms would have a minis­cule ef­fect on GDP, sim­ply be­cause agri­cul­ture is a very small part of out­put. Nonethe­less, such re­forms re­main de­sir­able and pro­vide an­other arena in which young Ja­panese could show their in­ge­nu­ity (though the TPP is not the best way to bring that about).

On the other hand, Abe is right to pur­sue poli­cies to in­te­grate women more fully and equally into the la­bor force. If suc­cess­ful, such mea­sures should pro­vide a boost to both pro­duc­tiv­ity and growth.

Even after a quar­ter-cen­tury of stag­na­tion, Ja­pan re­mains the world’s third­largest sin­gle econ­omy. Poli­cies that can help raise stan­dards of liv­ing there will stim­u­late de­mand and growth else­where in the global econ­omy. Equally im­por­tant, just as it has shared its in­no­va­tive goods and tech­nolo­gies with the world, Ja­pan could end up ex­port­ing suc­cess­ful poli­cies, with the same or sim­i­lar mea­sures in­creas­ing stan­dards of liv­ing in other ad­vanced coun­tries as well.

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