SYNOPSIS: Japan continues to try Supply Side solutions to a Demand Side problem
TOKYO — In a way, I wish that I had more negative things to say about the Japanese executives and officials I spoke to over the last few days. If the executives had been obviously out of touch with the realities of modern business, if the officials had been obstinate and foolish, it would be easy to dismiss Japan's economic malaise as the product of a deeply flawed social and political system — something that couldn't happen in America.
But by and large the people I talked to seemed well informed and reasonable. In fact, I'd say that the Japanese make far more sense now than they did when their economy was booming. Fifteen years ago, you just couldn't hold a rational discussion; even private-sector economists would refuse to criticize any government policy, no matter how absurd. Now it's possible to have real give-and-take.
And yet I've got a bad feeling about Japan's situation.
If good intentions and enthusiasm were enough to solve macroeconomic problems, economic recovery would be just around the corner. Prime Minister Junichiro Koizumi came into office with an unprecedented popular mandate, which he has used to pursue an ambitious program of "structural reform." And his approval ratings remain sky-high, even though he has explicitly warned that his reforms might produce several years of pain before Japan sees any gain.
But when you ask what the catch phrase "structural reform" reallymeans, doubts start to creep in.
So far, what the phrase seems to mean is mainly two things: forcing banks to write off bad loans and scaling back the huge public works programs that have been used, year after year, to prop up employment. Both steps are entirely justified. Sooner or later, Japanese banks have to get honest in their accounting. And Japan's public works programs have become a source not just of inefficiency but of vast corruption.
But here's the problem: the clear and present danger to Japan's economy is not inefficiency but inadequate demand. That is, the immediate problem is not that Japan fails to get the most out of the resources it employs; it is that it fails to employ the resources it has. And Mr. Koizumi's reforms are all too likely to worsen that immediate problem. When banks foreclose on companies that will never be able to repay their debts, when the government stops building dams and roads the country doesn't need, the direct result will be higher unemployment. In a booming economy, the workers released as firms go bankrupt and public works are canceled would soon find productive jobs elsewhere. But in a persistently depressed economy, those workers will stay unemployed — and because unemployed workers buy fewer goods, the economy will become even more depressed.
So where's the prospect for recovery? I put this question to Heizo Takenaka, the professor and popular pundit who has emerged — through one of those boundary-crossing transformations familiar in America but unheard of in Japan — as the architect of the Koizumi government's economic plan. To his credit, he didn't try to obfuscate the issue: he conceded that his plan is "supply-side" — that is, intended to make Japan's economy more efficient — when the immediate problem that economy faces is "demand-side" — people are spending too little. Nonetheless, he argued that eventually the reforms will help the demand side too. Once consumers realize that the economy's long-term prospects have improved, he asserted, they will open their wallets. And he also argued that further structural reform — mainly deregulation and privatization — would open new business opportunities, and thereby spur investment.
Well, maybe. But the plan does seem like a leap in the dark — radical measures taken because they might work, not because there is solid reason to believe that they will work.
The plan's chances of success would be much greater if it were supported by equally bold action on the part of the Bank of Japan, which controls monetary policy. But the attitude of B.O.J. officials seems to be the reverse of Mr. Koizumi's: they seem unwilling to take actions that probably would work, for fear that they might not.
So will Mr. Koizumi succeed? I hope so, but as I said, I have a bad feeling about this. The implicit slogan of the Koizumi government is "reform or bust." But it is dangerously likely that the actual result will be "reform and bust."
Originally published in The New York Times, 7.8.01