For Newsweek – Feb 4 2010
http://www.thedailybeast.com/newsweek/2010/02/04/hatoyama-s-to-do-list.html
You are a little-known politician who has enthused the public with promises of change. You win a thumping electoral 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 seems unsure what kind of change they want, or if they want any change 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 convince 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 local media. He has to tune out the advice of the experts, which has been largely responsible for Japan’s slow-motion economic trainwreck. 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 the reason why people voted for him. They had had enough of the LDP strategy of squeezing the household sector while protecting the interests of exporters. They were told that the policy of “gaman” – enduring pain uncomplainingly – 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-fuelled 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.
So what should be the Hatoyama administration’s priorities? The most important is to engineer an exit from deflation. The biggest obstacle, sadly, is Japan’s own central bank, which adamantly refuses to accept that its choices have a decisive role to play . The result of this monetary nihilism is that Japan, which has the most serious deflation problem in the world, is experiencing the least monetary stimulus. When the Bank of Japan was given independence in 1997, the political framework was inadequate, allowing the bank to make up its own remit as it went on. It is essential for the Hatoyama administration to remedy this defect by setting a clear inflation target.
Japan’s fiscal problems are 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. There is no way the debt-to-GDP ratio can improve when the denominator is shrinking; any attempt to impose a fiscal squeeze would end up tanking the economy and raising even less tax. Therefore the Hatoyama administration should pledge no tax hikes until the target of 3% nominal GDP growth has been achieved for several years.
Turning round Japan’s demographic shrinkage should be a national project, the DPJ’s equivalent of landing a man on the moon. With the baby boomer juniors well past peak fertility, there are no easy answers. Even so the DPJ’s proposed French-style child subsidies could make a significant difference if generous enough and broadly implemented. The money would come from smart taxes on the myriads of small companies that manufacture accounting losses in good times and bad. Greatly increased immigration from neighbouring countries is not a possibility. It is a certainty. The only question is whether it is properly regulated or becomes an underground activity controlled by less salubrious private sector interests. The government should greatly expand the student visa programme, and make permanent visas and citizenship much easier to obtain.
With the US and UK determined to shrink their financial sectors, the idea of Tokyo as an international financial center no longer seems absurd. All those prop traders, hedge fund managers, and derivatives salesmen need to go somewhere. Why not Tokyo – if the incentives are right. The Hatoyama administration should offer big tax inducements to this much-despised minority, and set up a sovereign wealth fund that would outsource investment to companies with significant on-shore 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 multi-million dollar fee.
A new economic strategy, commitment to tackling the demographic crunch – that at last would be change you can believe in.