Policy Recommendations to Japanese Political Parties as General Election Approaches
Policy Recommendation Forum for Economic Revival of Japan
(PRF Japan)
Shuntaro SHISHIDO, Chairman (Research Adviser of ERINA)
Hideaki KASE, Executive director (Foreign Policy Critic)
Haruki NIWA, Vice chairman (Professor of Economics, Osaka Gakuin University)
Japanese economy is said to have managed to stop its downward plunge and
to start showing signs of partial and slight upward trend, but the prospect
for its full recovery and prosperity is not yet at all visible. Predicament
of medium and small businesses remains extremely serious. Total assets including
properties and stocks lost by the Japanese due to recession during the last
decade is as much as 2,000 trillion yen, not to mention the plight of those
who lost jobs or family businesses. Vast hardships suffered by each and every
one of the populace are beyond description. Based on such awareness and in view
of the approaching general election, we strongly recommend the following to
the political world of Japan.
We recommend to all the political parities to publicly promise that they
will secure the economic growth of at least 5 % per annum for the coming decade
in order to secure fundamental recovery and revival of Japanese economy.
You should not even say that "it is impossible". Because it is,
on the contrary, extremely easy. We shall discuss the details of the reasons
why it is "extremely easy".
Utilize Enormous Real Fiscal Resources
- Japan lost \4,000 trillion during two decades -
Japanese economy currently has an extremely large surplus production capacity.
It is estimated that the level of potential real GDP that could be achieved
is 800 trillion yen once Japan's labor force and corporate capital equipment
reach the state of full employment and full operation. Actually, however, GDP
level that is realized is merely \500 trillion per year because of the insufficient
total demand. In other words, it is only 60% of the 'ceiling' of potential maximum
capacity, and the remaining 40% accounts for the deflationary gap. Potential
real GDP of Y300 trillion a year is lost to no purpose. (The Economic Planning
Agency has shielded this fact from people [as well as from politicians] by presenting
figures and concepts that look similar but are different from deflationary gaps
in the Economic White Paper.) Since the 'ceiling' itself still has an
upward curve, the gap continues its tendency to escalate. This gap is, needless
to say, surplus in production capacity and is none other than the 'real fiscal
resources' of our society. So long as we have this enormous 'surplus production
capacity', our economy will keep its growth without any difficulty so long as
the aggregate demand is increased.
This deflationary gap is not something that has appeared suddenly in recent
years. As shown in the graph (cited at the end of the paper), it began to appear
in or about 1974 and kept its trend of enlarging. Even during the period of
bubble economy, the growth rate was not so largely accelerated in the real economy
and the deflationary gap therefore hardly diminished. As the graph indicates,
the gross total of potential real GDP that were lost during the increasing process
of deflationary gap has become \4,000 trillion (in real value at 1990 prices)
during the 20-odd years from the middle of 1970s. If this trend continues, another
\4,000 trillion will be lost during the next decade. This will be an ultimate
damage for our economy. This is the actual status of the so-called 'lost decade'(actually
it is 'the lost two-and-half decades') of 'the defeat in the economic war'.
This must be, at the same time, an extremely large negative factor for the economies
of Asian countries as well as of the world. We would like to emphasize here
that such result of accounting basically leaves no room for doubt. That is to
say, if such result of deflationary gap were to be rejected, we would be forced
to deny all of the national income statistics, the employment statistics and
the enterprises' capital stock statistics.
Japan should break away from such a stagnant trend of the aggregate demand
that is creating a prolonged tendency of ever expanding enormous deflationary
gap at the earliest possible opportunity and stop the huge potential loss in
real GDP - 'real fiscal resource'. In other words, we must turn the level of
aggregate demand upward from the current stagnant
situation to start growth with a quick tempo as soon as possible. In this context,
maintaining the 5% annual growth in the aggregate demand is the minimum target
we should strive for.
So long as this enormous deflationary gap of 'surplus production capacity'
continues, even a decade of the 5% annual growth in the aggregate demand will
never create an inflationary gap where the supply cannot meet the demand. Accordingly,
there is no fear of steep price hike. If the 5% annual growth in the aggregate
demand is maintained, the annual growth of about 5% in real GDP can also be
maintained.
No Problem in 'Structure' of Japanese Economy
As mentioned above, if there were restrictions on 'the supply side' that
hamper the production and supply of commodities to meet the increased demand
such as a 'structural barrier' in Japanese economy, there is bound to occur
an inflationary gap and the resulting steep climb of prices. However, there
has been no such sign during the past two decades nor is there a sign of inflationary
gap in the present-day economy. On the contrary, the business has quickly and
optimally responded to the demands for production and supply of various commodities
(including services) in Japan, and there have hardly been instances of 'short'
or 'unsold' stocks due to imbalances of the supply and the demand. (This is
clear from the fact that the ratio of inventory changes to GDP is only 0.2%
to 0.5%.) There is thus no problem in 'the structure' of 'the supply side' in
Japanese economy. In other words, its market mechanism is most effectively functioning,
and there is a perfect balance between supply and demand. Because of the too
low level of aggregate demand, however, the equilibrium between supply and demand
also hovers low, creating the above-mentioned escalating trend of an enormous
deflationary gap. In sum, depression and stagnation of Japanese economy is caused
mainly by 'the demand side' - or by the short and insufficient aggregate demand.
This means that so long as the aggregate demand is increased adequately, it
is extremely easy to restore Japanese economy and lay a track for its vigorous
growth.
As is clear from the simple explanation given above, macroscopic 'structural
depression' can never exist in economic theory or in reality apart from the
lack of aggregate demand. And yet, the government, mass media, critics, business
world, labor unions and others made up their mind that Japanese economy was
in 'macro structural depression' having forgotten this most fundamental and
least doubtful axiom of the economic theory, implemented the policy called 'supply
side type' structural reform policies and supported them. However, such 'supply
side type' structural reform policies are utterly wrong for Japanese economy
that is gripped with the worst type of depression. 'Structural reform' trying
to abandon 'the real fiscal resources' or enormous surplus in production capacity
in Japanese economy is the worst type of error. Politicians of this country
should face this reality squarely.
Discussing the so-called slowing down of 'potential growth rate' is also non-sensical.
'Potential growth rate' is the upward slope of 'the ceiling' presumable as the
possible maximum limit for potential real GDP corresponding to the full employment
and the full operation as discussed above. However, as mentioned, since this
'ceiling' per se is far higher than the current actual level of real GDP, even
if the slope of such 'ceiling' became somewhat flattened, there are no factors
that would restrict the growth of Japanese economy in any way, at least for
another ten years. The view of the Economic Strategy Conference (officially
established by Mr. Obuchi's administration) is therefore entirely wrong in its
insistent emphasis on enduring with nearly 'zero growth' as 'the potential growth
rate has diminished'.
Fiscal Resources That Can Be Inexhaustible
To raise the level of aggregate demand by a high margin based on the intent
and policies of individual businesses are not possible. That individual businesses
have to try to restructure and rationalize means that businesses have to vie
and cut down their received values of orders from customers each other and that
depression and stagnation macroscopically intensify. This is the so-called 'synthesis
error'. But the (central) government can macroscopically manipulate the aggregate
demand through its financial and monetary policies. Therefore, the government
should be wholly responsible for determining and maintaining the macro-level
of aggregate demand and its growth rate. Our recommendation to the political
world as discussed above is based on this point. The government should be able
to quite easily and radically raise the level of aggregate demand when the country's
economy has a large-scale surplus in production capacity and no anxiety about
exhausting the reserve of foreign currency as it does currently. Therefore,
the government and the political world alike should not be so irresponsible
as to act as a bystander and hope for 'natural recovery course' of economy.
If the government were to pull up the aggregate demand on a full scale through
its fiscal policies, it certainly would need huge monetary financial resources.
And yet so long as Japanese economy retains the enormous 'real fiscal resources'
of huge surplus production capacity, there are naturally several options, to
utilize it, that place little burden on the government or people for raising
fiscal resources in terms of 'money' needed for the fiscal policies. To use
such options for achieving financial reconstruction of government should also
be extremely easy. Treasury revenue increases dramatically and naturally and
turns the government budget into black if the economic growth rate exceeds 5%
per annum.
As has become well known in recent years, since our government has enormous
debts as well as huge credits, it may be said on purely theoretical basis that
the government can still issue national bonds - particularly those of "construction
bonds" for public works for building highly efficient and excellent social
capital that may support Japanese economy. If these were to be 'consols' that
need no capital repayments, the burden on the government would be considerably
lifted. Alternatively, the Bank of Japan could be made to directly take over
the new issues including deficit bonds, and the government could defer interest
payments and capital repayments indefinitely. It would also be useful to invigorate
social capital investments using private financing initiative (PFI) backed up
by the official fund.
A simpler and more effective method will be for the government to issue more
'money' (government note). This is legitimate under the present legal system,
and is being implemented in the form of coins. At the time of the Meiji Restoration,
the new government was guaranteed of its revenue by issuance of 'Dajo-kan-satsu'
as irredeemable 'government currency notes' recommended by Yuri Kimimasa, which
helped them to accomplish the Restoration successfully. Now, following this,
the government should issue 'Dajo-kan-satsu of Heisei Era' (not the Bank of
Japan notes) as 'government currency (notes)' by exercising a full-scale government's
privilege of 'seigniorage' and earn huge fiscal revenue. It could be done more
smartly by, for instance, selling to the Bank of Japan some value amount of
the right to issue government currency (which can be considered as the intangible
asset of the government) and receiving the payments therefor as the fiscal revenue.
At any rate, such direct or indirect exercise of the state's (government's)
privilege to issue currency does not entail interest payment or capital repayment
no matter how big the amount to be earned is. It naturally becomes the genuine
revenue of the government. With this huge fiscal revenue, the government can
radically increase the aggregate demand - i.e. the total amount of effective
demand expenditure. (Since the focus is on increases of the effective demand
expenditure, our recommendation is not for 'reflative inflation policy'.) At
any rate, a little wisdom secures almost inexhaustive fiscal resources quite
easily. This will almost instantly reconstruct the affluent-sound national finance
and will impose little burden on future generations.
Multiplier Effect is Still Going Strong
Not only the political world but also people of Japan are trapped by a strange
social mind control, and quite a many people including politicians are convinced
that there is no longer effective policy for increasing the aggregate demand.
However, such belief is not well founded, and is entirely wrong.
For instance, the effects of several 'comprehensive economic measures for
counter depression' taken by successive cabinets since Mr. Miyazawa's administration
are considered almost nil even though they are claimed to have been implemented
on a grand scale, and disappointments for such policies are prevalent throughout
the political world and among the general public. The real situation is, however,
that the government has only insufficiently and inadequately implemented such
policies on the so-called 'fresh water'(i.e. net effective demand expenditure)
basis. This is quite clear from the fact that the growth of the government expenditure
(effective demand expenditure of the general governments, both central and local)
was merely 1.17 times between 1991 and 1997 in terms of the real national income
account (See Economic Planning Agency's series of year book, Annual Report
on National Account). In a situation where real private investment expenditure
is hovering low and the growth of government expenditure (i.e.,public investments
and various final government consumption expenditures including those for a
part of social security and welfare) is maintained as such low level, the total
of these two items of expenditure cannot be expected to be better than flat.
In fact, the total sum accounts for a large part of so-called 'autonomous' effective
demand expenditures, and since GDP is formed through the multiplier effect acting
on the 'autonomous' effective demand expenditures, GDP also remains stagnant
and the economic growth is hardly attainable. This was the real cause for perpetuation
of 'Heisei depression'. (We might say that Japan's bureaucracy has neglected
to explain this to the political world.) Macro multiplication factor of GDP
corresponding to total 'autonomous' effective demand expenditures is none other
than 'Keynesian multiplier', and its value has been steadily and solidly maintained
(at 2.4 - 2.5) throughout the period of 'Heisei depression'. We might say that
'multiplier effect' in Japanese economy is still alive.
Even though the public fund infused to bankrupt financial institutions has
already become huge, it is not the effective demand expenditure and it should
be considered to be of little effect for business recovery. This would be also
true of the case where the currency issue has been increased for the so-called
'reflative inflation policy'.
Household consumption expenditure (or private final consumption expenditure)
is characteristically dependent on the size of income and therefore cannot be
treated as 'autonomous' effective demand expenditure, but the ratio of the consumption
expenditure to household income - or 'the propensity to consume' - has risen
since 'Heisei depression' started (See Economic Planning Agency's Annual
Report on National Accounts,1999, pages 16 - 17). This means that the widely
prevailing theory that "the lowered household propensity to consume has
created Heisei depression" is entirely wrong.
Vision for Reconstruction of Japanese Economy
- Japanese people's "morale" and "moral" will improve -
In the present day Japan where huge production capacity surplus exists in
a form of super large-scale deflationary gap, production and supply of all kinds
of commodities can be increased limitlessly to respond to the growth in demand.
Therefore, implementation of such policy of escalating aggregate demand by the
government which has acquired almost inexhaustible resources by the measure
mentioned above will not be a burden for its people. On the contrary, business
and income will increase and people's living standard will rise.
Expansion of aggregate demand by such fiscal policies of the government should
naturally be implemented more rationally by radically increasing the effective
demand expenditures such as by construction of IT related infrastructure, which
will become the basis of the Japanese economy in the 21st century, improving
the transport system by building hub airports and new trunk lines, developing
new energy sources, improving the defense force, extending social securities,
improving the natural environment, etc. As mentioned above,'multiplier effect'is
thriving, and the increased government expenditure such as the above will increase
the aggregate demand and GDP that will reach the multiplier times.
However, the current situation is such that the government ministries and
local autonomous bodies are taking utterly negative posture because of the long
lasting depression and stagnation. The radical and grandiose 'country building
project' based on 'the long range national plan' has hardly been hatched. All
we should do to overcome this situation and to secure the economic growth is
to pay bonus of several hundred thousand yen to each and every one of the Japanese
people from babies to old people as 'expense to invigorate potential economy'
(by transfer to their bank accounts). This should be in a much larger scale
than the previous 'coupons for community economy promotion'. This can be carried
out in a far simpler and easier way in a much larger scale than the tax cuts,
its effect large and immediate, and very fair. There is no fear that the government
organization will become corpulent. Such measures can be described as most suitable
for the current market economy system where the mechanism of consumerism (
i.e., consumer's sovereignty) is basically functioning. It will not bring
any unnatural 'strain' to economy.'Multiplier effect' in such cases functions
quite steadily. Once such a measure is taken, the Japanese economy will enjoy
bright prosperity of high growth most easily. The interest rate can be returned
to the normal level. People's morale will be boosted and their morals elevated.
The government financial situation will unavoidably become very sound with a
large natural increased budgetary revenue. This is 100% sure.
As the growth rate of economy rises, the structural adjustment and reform
of the industry will automatically and smoothly proceed. The most of so-called
'delinquent loans and bad assets' will instantly become fine loans and good
assets and obviate the problems of insolvency of financial institutions. In
sum, the priority should be placed on restoring the business conditions and
realizing the growth economy. It should not be the reverse. (Therefore, if the
current depression and stagnant situation were left un-rectified, there is no
guarantee that liquidation at a great cost of delinquent finance institutions
will recover the business trend.)
Such economical conditions with a high growth rate were to be realized, the
exchange rate of yen would become far lower than the current rate so long as
the current floating exchange rate system is maintained. Thus, our industry
will strengthen its competitiveness without efforts and Japan will be liberated
from the bad dream of hollowing out of industries.
Politicians, Awake and Rise!!
There is not the slightest doubt about correctness of the economical analysis
made by us. Our policy proposals are bound to achieve more than satisfactory
results. Therefore, once the politicians - and therefore the policy makers -
make up their mind to adopt and implement them, it is possible to maintain our
economic growth at no less than 5% per year (or even achieve 10% growth). It
will also be quite easy to achieve reconstruction of our national finance. Only
then, Japan will be able to utilize the huge 'real finance resources' of enormous
production capacity surplus. This will be a great contribution to economical
prosperity and welfare not only of the Japanese people but also of the entire
mankind.
If, on the contrary, policies that "stop the business recovery policies
by increases of the aggregate demand and prioritize the structural reform in
a most through way" were to be enforced, depression will further proceed
and perpetuate, and 'the real finance resources' of '4,000 trillion yen of 10
years' dumped. Giving such a huge damage to our economy in no way guarantees
restoring prosperity and growth to our economy. There is no logical guarantee
that reconstruction of our state finance will be achieved. In this context,
prioritizing structural reforms is a most perilous political attitude.
We sincerely and strongly hope that political parties and politicians will
see this risk, awaken and rise.
|
Note to Graph
When the rate of increase in productivity of aggregate inputs (TFP) is described
as the 'rate of technological progress',
GDP growth rate(%) = rate of technological progress (%) + growth rate of aggregate
inputs of labor and capital(%).
If the ratio of 'technological progress rate(%) / GDP growth rate(%)' is given,
the yearly growth rate(%) of potential 'full capacity GDP' can be obtained from
the growth rate of aggregate inputs of 'full employment and full utilization'of
labor force and fixed capital stock. Of course, the index of the level of potential
'full capacity GDP' can also be computed with ease as the link series of these
growth rates.
In the graph, the growth path of potential 'full capacity GDP' shown as 'high'
is based on the assumption that the ratio of 'technological progress rate (%)
/ GDP growth rate (%)' is 1/3. The path is shown as 'middle' based on the assumed
ratio of 1/3.5, and 'low' based on the assumed ratio of 1/4. Even in the conditions
of potential 'full capacity GDP', there remains 3% deflationary gap due to frictions,
etc.
For details of the calculation process and the data used, refer to Niwa, H.,
: Economics of the Economic Revival of Japan, Hara Syobo, Tokyo 1999
(in Japanese),Chapter 16,pp.313-344. See also Niwa, H.,"The Recent Deflationary
Gap in Japan: A Quantitative Measurement", Journal of Asian Economics,
Vol. 11, No. 2, Summer, 2000 (forthcoming).