Newsweek Feb 4 2010
http://www.thedailybeast.com/newsweek/2010/02/04/hatoyama-s-to-do-list.html
Japan can come back. Here’s how.
You are a little-known politician who has stirred the public with promises of change. You win a thumping elec-toral victory. You succeed a tired and discredited administration whose policies helped create the worst economic crisis in decades. And then your problems start: The vested interests won’t give an inch. People seem unsure of what kind of change they want, or if they want any at all. The economy is still in bad shape, and now you are getting the blame.
That’s the situation facing Japanese Prime Minister Yukio Hatoyama as he contemplates corruption scandals, doubts about his leadership, and crumbling poll numbers. Ahead of him lies a mission as tough as President Obama’s task of preparing free-spending Americans for the coming age of austerity: he has to persuade the pessimistic Japanese to save less and consume more. To do this he has to ignore the doom-mongering of the ratings agencies and the media. He has to tune out the advice of the experts, who have been largely responsible for Japan’s slow-motion economic train wreck. He needs to stop worrying about government bond yields, which are at the lowest levels in world history, and start worrying about the stock market, which is no higher than it was in 1984.
Most of all he needs to remember why people voted for him. They had had enough of the Liberal Democratic Party’s strategy of squeezing the household sector while protecting the interests of exporters. They were told the policy of gaman—enduring pain without complaint—would lead to a stronger, more self-sufficient economy. The global crisis shattered that promise. Japan took a larger hit to GDP than any other developed country, despite playing little part in the debt-fueled excesses. If you party hard, you can’t complain about the hangover. Japan stayed on the financial equivalent of bottled water, yet ended up with the biggest headache of all.
What should Hatoyama do? The most important thing is to end deflation, which raises the real cost of debt, causes companies and families to hoard cash, and snuffs out the animal spirits of entrepreneurs. The central bank could help stop this downward spiral by pouring more money into the economy, but it refuses to accept that it has a role to play. Instead, since 1997, when the central bank was given nominal independence from the government, it has been making up its job description as it has gone along. Now the Hatoyama administration must take a firm hand in guiding the bank by setting a clear inflation target.
Hatoyama must also deal pragmatically with the government’s indebtedness, which is the result, not the cause, of its deflationary dynamic. The major factor behind the yawning government deficit is the erosion in tax revenues as low-paid workers drop out of tax-paying brackets, profits plummet, and asset values decline. What’s more, there is no way the debt-to-GDP ratio can improve when the economy is shrinking. Any attempt at reining in spending or raising taxes would end up tanking the economy and raising even less tax revenue. So the Hatoyama administration should pledge no tax hikes until the target of 3 percent nominal GDP growth has been achieved for several years.
Finally, the government must face Japan’s demographic problems. With the baby boomers well past peak fertility, there are no easy answers. Even so, the Democratic Party of Japan’s proposed French-style child subsidies could make a significant difference if they were generous enough. The money would come from the legions of small companies that conveniently chalk up accounting losses even when the good times are rolling.
The government should also encourage immigration by greatly expanding the student-visa program, making permanent visas and citizenship much easier to obtain, and expanding the financial-services sector. With the United States and Britain determined to shrink their banking industries, the idea of Tokyo as an international financial center no longer seems absurd. All those derivatives salesmen need to go somewhere. Why not Tokyo? Hatoyama should offer tax inducements to this much-despised minority, and set up a sovereign wealth fund that would outsource investment to companies with significant onshore presence in Japan. For Americans eager to escape the clutches of Uncle Sam, there could be rush clearance for citizenship on the payment of a multimillion-dollar fee.
A new economic strategy and a commitment to tackling the demographic crunch—in deflation-ravaged Japan, that at last would be change you can believe in.