Outlook: There is no quick fix for Japan

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The Independent Online
THE JAPANESE were miffed that the other six members of the G7 ganged up on them at the finance ministers' meeting at the weekend. Senior Japanese politicians continue to insist that steps already taken to reflate the economy are sufficient. This is plainly nonsense, even if Japanese annoyance about the public ding-dong is understandable. Japan looks dangerously close to economic and financial collapse, and with it the rest of Asia. All the same, it is not clear that the big tax giveaways proposed by the Americans and others are the right solution.

Let's forget for now the fact that the IMF has until very recently been warning Japan to get its ballooning government deficit and debt under control. A bigger deficit probably wouldn't help anyway. Consumers are saving, not spending. Company profits are too low to benefit from a tax cut. And the government has already spent a fortune on public works white elephants. If the government has to borrow heavily to deliver the tax cuts, the money might simply end up going round in a circle and the whole thing would be a zero sum game in terms reflation.

Turning to monetary policy, the Bank of Japan could hardly cut interest rates any lower. Besides, demand management cannot tackle the country's deep-seated structural problems. Banks have lent to industry on non-commercial terms for decades, with the edifice propped up by the collateral of land and shares whose artificially inflated prices have now collapsed.

There is also a third way - to monetarise the bad debts of the banking system. The effect of such an approach would not be dissimilar to printing money and then disseminating it randomly through the economy, perhaps by dropping it from helicopters. In most countries this would be a highly inflationary thing but in a country where the main enemy is deflation, the effect might be beneficial. The Japanese government has already made as much public money available to the banks as the US authorities did in the aftermath of the savings and loan crisis. The problem is persuading the banks - reluctant to be seen needing the assistance - into accepting it.

And in any case, shoring up the capital base of the banking system may not be enough either. The idea is that the banks issue bonds to the government - in effect passing on their own bad debts - but they still need to inject the money they get in return into the economy. The authorities will have to hope that structural reform such as deregulation of restricted markets like telecoms will create sufficient profitable opportunities for lenders. As can be seen, the G7 is wrong to push for a quicker fix. There is none.

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