Structural reform not an either/or problem

Yomiuri Shimbun, 29 September 2002

A recent Yomiuri Shimbun survey shows widespread sentiment in favor of immediate tax reforms. Hiroshi Ota, assistant managing editor of the paper, warns of a deepning crisis due to inadequate economic policies pursued by the Cabinet of Prime Minister Junichiro Koizumi. Ota calls for a swift change in the nation's economic management.

The Cabinet does not want to bear the responsibility for the fate of the economy.

The slogan—no economic recovery without structural reforms—with which Koizumi won the election, clearly illustrates his policies, which prioritize structural reforms over the economy.

The slogan leads to the type of simple binary classification that the prime minister is good at creating, forcing people to take sides on whether they support or oppose reforms—whether they are reformers or resistors.

However, the economy's historic woes and repeated policy blunders clearly show that the slogan has completely failed to bring about the desired results.

The Yomiuri Shimbun's latest survey on tax system reform, taken on Sept. 21 and 22, indicated that people were upset by the current economic condition.

The Nikkei Stock Average has fallen to the 9,000 level—a state of emergency. Koizumi-induced deflation has driven the country into a corner. The unemployment rate is at a record high and the prolonged economic slump has exhausted companies.

Low stock prices have dealt a blow to finances, resulting in a vicious circle that further brings down stock prices.

People are overwhelmed by a sense of resignation and helplessness.

The weakened Japanese economy is vulnerable to shocks from outside factors.

If U.S. stock prices, which have shown signs of falling, plunge significantly, the Japanese economy will further deteriorate.

A parallel can be drawn between the current situation and the nightmare brought about by the 1929-1931 Cabinet of Prime Minister Osachi Hamaguchi, which resulted in the Showa Depression.

The economy cannot afford to go down further. The prime minister should summon the courage to switch to a policy to lift the economy out of deflation. He does not have to worry that the existence of his administration will be undermined if he changes his policy.

Bringing deflation under control is the only way to save the country and his administration.

Koizumi's policies are a mixture of reckless logic. The slogan—no economic recovery without structural reform—which forces people to take sides, is typical of this thinking.

Structural reforms are designed to improve the supply side of the economy, including raising corporate productivity. They are not an alternative to macroeconomic measures designed to boost low demand and fight deflation, which have amounted to tens of trillions of yen.

As the economic slump is obviously caused by low demand, the government should adopt fiscal and financial measures to fight deflation while carrying out its structural reforms.

It is a ridiculous illusion that reforms can proceed by tampering with the economy.

Koizumi has also tried to dispose of nonperforming loans while carrying out policies that have caused deflation.

People have a biased view that financial institutions did not make sufficient efforts to write off nonperforming loans.

Actually, financial institutions have already disposed of nonperforming loans caused by the bursting of the bubble economy.

The reason that such loans keep growing is that many companies were driven into a corner due to deflation, resulting in a rapid increase in new nonperforming loans.

The prime minister said he would accelerate the disposal of nonperforming loans, but he does not seem to understand that his deflation-inducing measures are the key cause of bad loans.

If he does not bring deflation under control, he may waste public funds that could be used to help rebuild finances.

It also does not make sense to attempt a fiscal reconstruction during a deflationary period.

The recent fiscal deficit was not caused by an increase in expenditures. It was caused by a sharp fall in tax revenues because of the economic slump.

The current conditions show that no country can carry out fiscal reconstruction during an economic slump.

Reforms are necessary, but if deflation is left unattended, all reforms will fail.

Prompted by the plunge in stock prices, the Koizumi Cabinet has begun mapping out emergency measures, but the stock market is well aware of the government's lack of serious policies to fight deflation.

It is contradictory for the government to advocate reforms during a deflationary period and try to hammer out measures to boost the economy.

The worst thing Koizumi can do is to implement single antideflationary policies.

What he has to do now is concentrate on mapping out wide-ranging economic measures to fight deflation.

The core of these measures should be the reform of the taxation system.

The government should reduce taxes significantly by assisting corporate research and development and capital investment, lowering the effective corporate tax rate, and reforming the security and land tax systems.

The tax system is a plan for a country's strategies, and can be a weapon capable of fighting deflation and carrying out reforms at the same time.

The compilation of a supplementary budget is also necessary to prevent the economy from collapsing.

The Bank of Japan has to hammer out new financial measures, including a numerical inflation target.

The disposal of nonperforming loans is not possible without both fiscal and financial policies to fight deflation.

In order to protect the financial system, the central bank made the audacious decision to purchase stock shares owned by banks. The government should not leave the central bank in the lurch.