There is much to fear from Japan rescue plan
The problem is that these ideas are hardly credible, given the make-believe tone of the rest of it
Thursday 26 November 1998
I have just been looking at two things: the outline of the package itself and the deterioration of Japan's fiscal position. Neither is a pretty sight.
The reports of the package have focused almost entirely on three of its facets: the efforts to shore up the financial system; the fiscal boost; and the novel idea, already introduced in an earlier version of the plan, of "helicopter money" - giving spending vouchers to the under 16-year- olds and to people eligible for public welfare assistance, to be spent within six months.
Each of those aspects of the plan has been greeted with various concerns: whether, for example, the banking system will really be able to re-establish public confidence; whether the public works/tax cuts are well targeted; whether the gift vouchers are really a sensible way of using tax revenue. (The administrative charges for running the scheme will mop up more than 12 per cent of the total cost.)
The reports of the scheme did not pay much attention, however, to its wider aim, which is to start a refocusing of the entire Japanese economy. Until I read through the provisional translation of the outline I had not realised that there is a lot of detailed planning going into the redirection of growth away from production of goods and towards improvements in lifestyle.
As any visitor to the country will appreciate there are many aspects of the lifestyle which are very attractive: the cleanliness, order and safety of its cities for example. But there are also aspects that could clearly be better - where people do not live as well as they should. So it is encouraging that the package includes a plan to double the size of living space. Larger houses would not only enormously improve the quality of life; they would also create more space both for additional consumer durables and for additional people. This last point matters. Along with Italy and Germany, Japan has one of the lowest fertility rates of the G7.
The problem is that these ideas are hardly credible, given the make-believe tone of much of the rest of the plan. Thus there are assurances that the economy will achieve growth in 1999. I suppose that is possible, but anyone who has spent time with Japanese officials will know that sometimes official words mean nothing. If, therefore, the economic objectives are not met, the very sensible social and lifestyle objectives may also be undermined.
The dangers that arise if the economic objectives are not met grow almost daily. Just yesterday, it emerged from the Ministry of Finance that Japan might face a pounds 50bn revenue shortfall from lower receipts from corporation taxation. MoF officials fear that the budget deficit could reach 10 per cent of gross domestic product (GDP).
Now have a look at the graph. It shows the Japanese general government deficit over the last nine years, together with forecasts for the next two. The government was running a surplus 10 years ago and a manageable deficit through the Nineties. But now the country is facing a fiscal catastrophe. A budget deficit of 10 per cent? That is the sort of thing you would expect from Russia. At no time during the entire post-war period has Britain run a deficit on that scale, even when we lost control of public spending in the mid Seventies.
Indeed, the actual position is even worse than the one set out in the graph, which only covers central government. You have to add local government borrowing, which could bring the total public-sector financial balance to 12 per cent of GDP in 1999. No wonder Japan's debt rating has been downgraded by Moody's, the United States rating agency.
If a fiscal policy appears not to be credible, people freeze. Lenders freeze; consumers freeze; companies freeze. People know that whatever is happening will have to be reversed, and save for the coming rainy day. That is precisely the danger Japan faces now. Conventional wisdom holds that given the over-riding need to boost demand, it is right to run a larger fiscal deficit. The dreadful truth may be that this is wrong: that running a deficit which is not credible will actually have the perverse effect of cutting demand.
This will take place for several reasons. Most obviously, if the larger deficit were to push up long-term interest rates, the additional borrowing by the public sector would be likely to be offset by lower borrowing by the private sector. This has not happened yet. There has been a widening of the "Japan premium" in the financial markets - the rate at which their banks borrow from other banks above the normal inter-bank rate. That reflects foreign concern about their credit-worthiness. Concern about the government's credit-worthiness (as opposed to tthe banks') has not yet pushed up bond yields, which are ludicrously low. The levels of domestic savings are so enormous that funding the deficit is not yet a financial problem, and it may never become one.
But there is a difference between a financial problem and a psychological one. If Japanese people feel the government is being irresponsible by borrowing so much, they may themselves simply save more - and thereby offset any fiscal boost the additional spending might generate.
In short, the Keynsian pump-priming being urged on Japan may not work. Worse, it may actually have the perverse effect of cutting demand because of its impact on confidence. Everyone knows that a lot of Japanese public investment is of poor quality. If a country borrows for stupid projects people realise that sooner or later they will have to foot the bill.
So what is to be done? The answer is to deregulate and to cut personal taxation: to do what the US and Britain have done to convince ordinary people that it is reasonable that if they work hard they should enjoy the fruits of that work. It is a novel idea in Japan. But expect to hear much more of it in the months to come. Meanwhile, outsiders should resist urging the Japanese government to borrow more money: they will not have to pay back the debts.
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