The Koizumi Cabinet Sheep To The Slaughter

Back to Contents of Issue: January 2003

- Gregory Clark writer, lecturer and former president of Tama University

WHEN KOIZUMI PEOPLE TOLD us they could revive Japan's economy by privatizing the Highway Corporation or the post offices, we knew they were into rearranging Titanic deckchairs. Now, with the boat taking in water furiously, we are told that the answer is something called the Industrial Revival Agency, which will rescue enterprises bankrupted by Koizumi policies. In other words, from arranging the deckchairs they are now into organizing the lifeboats. And they still think they are rescuing the ship.

The mistakes made in the handling of the Japanese economy in recent years have been monstrous. To any impartial observer, it should be obvious that a nation with abnormally high household savings and JPY1,400 trillion in personal financial assets is going to suffer a massive demand gap unless everything is done to push that money back into the economy. But instead of trying to close that demand gap, the planners have been doing their best to widen it with their bank purging and fiscal stringency policies. When they should have been pressing the accelerator, they were slamming on the brakes. When they should have been going forward, they were trying to go backward. Or to go back to the Titanic analogy, when they should have been pumping water out, they were busily pumping it in.

Only an economy as strong and resilient as Japan's could have stayed afloat as long as it has. But now it too is in danger of sinking. Much the same mistakes were made in the US in 1929, with consequences we all know about. And since the names and mistakes of the guilty then have been recorded for posterity, maybe it is time to start doing the same for Japan, if only to help prevent the tragedy from happening again next time -- assuming there will be a next time.

Heading the guilty list is none other than the prime minister himself. From the beginning it should have been obvious that he was ignorant of economics. In speech after speech, he would rail on semi-hysterically about the official deficit problem with no hint of realizing how or why it was there and what could realistically be done about it. Inevitably, he would have to leave policy details to the darling of the TV talk shows -- the garrulous and unflinchingly dogmatic Keio University economist Heizo Takenaka.

Koizumi's main aim has been to hit back at some of his factional enemies by abolishing the entities they used as sources of corrupt funds. That has some political benefits. But it does nothing for the economy.

Next on the guilty list comes the Japanese public with its unthinking and emotional weakness for the word kaikaku (reform). For a while it was "political reform" (now shown up to be a shambles). Then it was administrative reform, then education reform. All ended with negligible results. But at the time, everyone had a nice warm feeling that things were being done. Now we have Junichiro Koizumi with something called "structural reform." Before him came Ryutaro Hashimoto in 1997 with his promises of fiscal reform (i.e. the fiscal stringency policies that sent this economy into its first tailspin and which are now being repeated by the Koizumi reforms).

True, if I were a citizen of these islands fed up with the never-ending revelations of waste, corruption, political scheming, big business collusion and bureaucratic empire building, I too would probably welcome anything that promised reform. But I would first check out the details. A promise to change the world by cutting fiscal spending in an economy suffering a severe demand gap was a formula for disaster right from the beginning. Yet only a few brief years after the Hashimoto disaster, the Japanese public let itself get lured into yet another disaster.

Third on my guilty list come the theoretical economists headed by Heizo Takenaka and based mainly at Keio and Hitotsubashi universities. I know these people. They are immature men. Few have any real contact with the outside world of business. Their simplistic textbook market fundamentalist theories are their psychological props.

Until recently these people were infatuated with the seeming success of the US economy. Time and time again, I had to share discussion platforms with them where they would rave on about how the coming IT revolution would propel us all into a nirvana of perpetual economic progress. "Buy into Yahoo and Softbank before it is too late," was the very non-academic advice from one of them.

Within Japan, the only economists to get it consistently right have been Richard Koo of Nomura Research and the gentle female economist, Fumiko Konya. Needless to say, their calls for fiscal stimulus are generally drowned out, though they do get to appear in talk shows where some opposing voice is needed.

Western economists have not done much better. Paul Krugman of the US has long realized the need to fill the demand gap before embarking on so-called reforms. So, too, has Andrew Smithers of the UK, though his focus on the exchange rate seems too narrow. Most of the rest seem blindly to have endorsed the Koizumi/Takenaka line, and not just because they too embrace market fundamentalism.

What they don't realize is that the many seeming faults in the system are marginal to Japan's economic problems. Indeed, many of those "faults" -- lack of labor mobility; close bank-enterprise ties; contempt for shareholders; bias to manufacturing rather than services, et cetera -- were once hailed as the keys to Japan's success.

The gaijin economic gurus employed by the Western securities companies and other think tanks here have not done better, even if some have begun to temper their words lately. One of the more prominent has gone from enthusiastic approval for Koizumi policies to deep warnings of impending deflation without even seeming to realize the connection between the two. In between, he praised Tokyo for eliminating financial socialism at precisely the same moment that the authorities were talking of having to nationalize the banks and were relying on semi-official banks like Shoko Chukin to rescue companies denied funds by private banks. Now with the planned industrial revival agency, we are deep into economic communism.

Then we have the Western media, which have been unrelentingly wrong in their diagnoses and remedies for the Japanese economies. Guiltiest has been the Financial Times of the UK and the Wall Street Journal of the US, both heavily caught up in the same free-market, supply-side fundamentalism that also did so much damage to the Russian and many other economies around the world. The International Herald Tribune has not been much better. The influential Foreign Affairs has run a constant barrage of articles sounding off about Japan's many structural imperfections. None are interested in running contrary opinions.

Within Japan, the situation has been confused, with the normally right-wing Yomiuri Shimbun stable pushing a solitary campaign for controlled inflation and Keynesian fiscal stimulus policies, while the rest have gone along with the tide favoring Koizumi. The progressive Asahi Shimbun, which should know better, remains enthralled by the word "reform."

The Nihon Keizai Shimbun's position has been interesting. As the main economic newspaper, it has clout. For a while it went overboard for the Hashimoto and then Koizumi policies, making little effort to disguise its fundamentalist and right-wing bias. Keynesian policies were denounced as outdated left-wingism. I used to get a good run in its pages, but was put firmly on its blacklist after I came out in open criticism of its fundamentalist line.

But starting about two years ago, the Nikkei seems to have suffered a sea change. It began to challenge the Koizumi line occasionally. A year ago, when Takenaka came out with yet another of his typically arrogant White Papers condemning "outdated Keynesian theories," it asked gruffly how an economy clearly lacking demand could recover by further reducing demand. Good question. Just wish it had been asked earlier.

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