Speech before the Los Angeles World Affairs Council on April 23, 2001:
Taichi
Sakaiya
Director General, Economic Planning Agency, Japan
Outline of Speech
I. Introduction
1. The Japanese economy is currently experiencing some tough
times. In particular, the downturn in the securities market and the weakening of
the yen are highlighting this situation. The government has now acknowledged
that the economy is deflationary for the first time since WWII.
2. The Bank of Japan has decided to increase cash reserves held by
banks in the BOJ current account to the 5 trillion
yen level. This means an increase in the money supply, and a cut in the interest
rate to zero in real terms.
3. The Japanese government announced an Emergency Economic Package
on April ~ including proposals to establish an equity purchasing organization to
absorb the excess securities banks are holding and to ask financial services
institutions to write off bad loans within two years. But specifics have not
been provided with regard to the most important land related issues, or measures
to deal with employment issues.
4. The Japanese economy is facing three major problems. First, its
economic structure and behavior patterns are firmly based on a standardized mass
production system. This holds Japan back from participating in the knowledge
value revolution. Second, there are a significant amount of bad loans, which are
aftereffects of the bubble economy during the 80’s. Third, Japan is
experiencing its “Second Trough”.
II. An Industrial Society Led by Bureaucrats
1. After WWII, Japan built an industrial society based on
standardized mass production. It did this under the guidance of bureaucrats.
Because of their spectacular success in this effort, Japan missed making a
timely move to join the knowledge value revolution. This in turn caused the
bubble economy. (Refer to Chart)
2. When the bubble economy burst, the prices of land and stock
fell precipitously. The fall in prices generated a massive amount of bad loans
for Japan’s financial institutions. (Refer to Chart)
3. When the Obuchi Administration took office in July 1998, one of
its acts was to implement and Emergency Economic Package. The goals were to keep
the economy from a deflationary spiral; to aim at rebuilding the financial
institutions; to prevent small to mid size businesses from going out of
business; to reduce taxes; and to expand publicity funded policy. In the
Financial Services area, as a specific example, 19 nationally chartered banks
have been consolidated into 4 large groups.
4. The
package also had as its goal the promotion of free competition through
deregulation. One outcome of these actions is that Japan is seeing waves of
reform.
III. The Economy Hits Its Second Trough
1.
We did see a bit of an economic recovery as a result of these actions. In
fact, during the first half of 2000, there was a mounting call for “fiscal
rebuilding before the economic recovery.”
2.
I expected the economy to slide down to its second trough in the fall of
2000. Once the underpinnings provided by the Emergency Economic Package are
removed, weak corporations and noncompetitive businesses will fail. This is the
inevitable pain generated from economic re-structuring.
3.
Japan is resolved to endure this pain so it can move forward on
structural reform and achieve the knowledge value revolution. This is evidenced
by the fact that, in the Emergency Economic Package announced on April 6th,
the government is asking financial institutions to finally eliminate bad loans
by the end of fiscal year 2003.
4.
However, the Emergency Economic Package does not spell out specific
measures relating to land related policies or employment issues. That leaves one
with some concerns. These points will probably not be addressed until after the
Upper House election scheduled for July.
5.
In spite of the above,
I expect the Japanese economy to recover not too long from now We see
improvements in corporate profits, overall employment, and the employment of new
college grads. Salary increases through the spring labor negotiations turn out
to be par to last year, but with the falling price of goods, the value of the
salaries is increased. These are hopeful signs for expanding consumption. The
number of people traveling during the vacation week in May is expected to
increase by 5.8%.
IV. Why is Japanese structural reform moving so slowly?
1.
I am not satisfied with the scope and the speed of structural reform in
Japan.
2.
First of all, the areas of education and medical care are excluded.
3.
Second, the progress of restructuring is slow due to the difficulty of
resource adjustment under our lifetime employment system.
4.
Third, Japan’s generation of new businesses is only a quarter of that
in the US. (Refer to Chart)
V. Japanese Fiscal
Condition: In Convalescence
1.
The Japanese fiscal situation is improving somewhat, but still it is in
grave condition. The aggregate of outstanding national and local government
bonds amounts to 666 trillion yen, which is 130% of GDP. The 2001 preliminary
budget dependence on JOB is 34%.
2. Currently the Japanese economy is in convalescence. The
country’s corporate profit rate is low (Refer to Chart), and due to the
write-off of extraordinary losses, tax revenue is very low If and when the
economy recovers and economic structural reform is implemented, tax revenue will
grow considerably.
3. Of course, in order to rebuild fiscal health, publicly
supported projects should be reduced as the economic recovery builds. Also we
need massive reform in the pension and national health insurance systems that
address the needs of our rapidly aging population.
VI. Corporate debt has
its roots in real estate problems
1. Japanese corporations have written off an enormous amount of
debt so far, but it is reported that a significant amount of debt still remains.
(Reportedly about one third is still being carried.) The bad loans the Emergency
Economic Package is addressing, namely loans to companies that are classified as
“in danger of bankruptcy” or worse, reportedly amount to 24 trillion yen.
2. In order to directly deal with this problem, real
estate-related issues must be resolved. Most of the bad loans carried by
Japanese financial institutions are secured with land whose prices were inflated
during the bubble. The ultimate resolution of this problem will not be achieved
until the land is sold off
3. To resolve it’s real estate problems, Japan has to change
direction in its urban planning policies, relaxing building restrictions and
usage restrictions so that expanded usage creates value.
4. In regard to the above, the Emergency Economic Package of April
6d~ does not address the issues sufficiently. Some government
bureaucrats have not changed their old mindsets. Politicians and the general
public need to watch them closely.
VII. The Japanese save
too much, and Americans spend too much.
1. From a macro point of view, Japan has excessive personal
savings. Compared to the US, the Japanese savings rate is quiet high (Refer to
Chart)