Discuss Japan > Back Number > No.11 > TOP MANAGERS DEBATE THE CONSUMPTION TAX ISSUE — No TIME FOR DELAY? OR ARE THERE THINGS TO DO BEFORE TAXES ARE INCREASED?
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No.11 ,Economy  May 21, 2012

TOP MANAGERS DEBATE THE CONSUMPTION TAX ISSUE — No TIME FOR DELAY? OR ARE THERE THINGS TO DO BEFORE TAXES ARE INCREASED?

The Noda administration has released a plan titled “Comprehensive Reform of Social Security and Tax”, which includes measures such as increasing the rate of consumption tax. They appear to be determined not to concede an inch, but their approach has come in for much criticism. Japan’s budget deficit is clearly in crisis. Looking at opinion polls on the question of raising taxes, the public are expressing a certain degree of understanding with regards to the issue itself, but are opposed to the way politicians are going about it.

In a time of crisis, the attitude that leaders adopt is crucial.

With this in mind, last year I interviewed two of Japan’s top business leaders. Two men who are well-known as two of the most capable managers in Japan, whose companies have overcome adversity under their strong leadership. They come from completely different industries – construction equipment on the one hand, and retail on the other – but they both share an image of being “reformers” of the top companies in each industry.

Sakane Masahiro, now the Chairman of Komatsu, joined the company as a bulldozer technician. In 2001 he was appointed president. At the time, Komatsu was in the red to the tune of 80 billion yen, their worst result ever. Despite starting from negative territory, he carried out decisive structural reforms. As a “one-off major surgery”, he launched a program of reorganizing subsidiaries and cutting staff levels. He also pushed for the development of the kind “second-to-none product” that competitors would not be able to match. Under his leadership, earnings recovered rapidly.

Suzuki Toshifumi, Chairman of Seven & I Holdings, is upbeat despite the slump in consumer spending. Seven Eleven, one of the group companies, has booked record profits. And they have plans to open another 1350 stores next year. Suzuki is in high spirits, saying “The market is still not saturated. We just need to win the competition with other stores.” He is also intent on developing new markets, such as targeting older demographics.

Viewed from the perspective of a company, raising the rate of consumption tax is like increasing prices. So how can the government get the people on board? In this article, these two leaders, who have had to face up to their customers and staff as they pursued reforms, give their opinions on raising taxes based on their personal experiences.

Avoiding the Fate of the Boiled frog

Sakane Masahiro (Chairman of Komatsu) interview by Demachi Yuzuru
Photo : Sakane Masahiro
Sakane Masahiro

It’s a fairly cruel metaphor, but I think Japan today is a lot like a boiling frog. If you put a frog in a pot of cold water and then gradually bring the water to the boil, after a while the frog starts to think, “Gee, it’s nice and warm in here.” However, once the heat reaches a certain point, the frog finds that it no longer has the power to jump out of the pot. This country is already come very close to that limit. Lately there has been a lot of fuss all around the world about the fact that some European countries have had the ratings on their government bonds downgraded from AAA. Japan also belongs to this type of country, except that the rating on Japanese government bonds is already AA- to start with. This is really not the time to be worrying about anything else. This rating is already a really low level, and this is a terribly grave situation.

The fact that downgrading a country with a huge economy like Japan would throw the world into chaos, together with the often repeated fact that even the Japanese government has a lot of debt, Japanese individuals have money, and the fact that income balance has allowed Japan to maintain a current account surplus despite recording a trade deficit for the first time in thirty-one years – all of these factors are acting as a deterrent, but the rating agencies are all only a hair’s breadth away from downgrading Japanese bonds anyway. But once the situation in Europe settles down there is no doubt that Japan will be the next target.

I support the five percent increase in consumption tax that Prime Minister Noda Yoshiko announced.

What I would like to emphasize to those people that have a optimistic outlook for the finances of Japan is that if we wait until after Japan has been targeted by the markets before trying to respond then an increase of five percent is just not going to cut it. I expect we’ll be forced to increase consumption tax by ten or even fifteen percent. We’ll end up just like Korea under the administration of the IMF during the Asian Financial Crisis in 1997. There is no doubt that would be a disaster. The Korean economy has now reached the point where it is receiving praise from all directions, but they certainly became quite a distorted society after going through the miserable experience of 1997.

It’s possible that Japan won’t be able to resolve its structural problems unless it too is driven to the same point and takes shock therapy. But the country’s leaders should never allow that to happen.

What I really can’t stand is when people give all kinds of reasons for putting the problem on the back burner, saying “Cut waste before you raise consumption tax,” or “Reduce the number of seats in the Diet”, or “Economic conditions might get worse.”

What we need from the leaders of this country is to stand up and say, “We’re going to do everything, all at once. Otherwise, Japan will be bankrupt.” Then they can say, “And that’s why we need you to let us raise the rate of consumption tax, the thing that people hate more than anything else.” However, at the same time they absolutely have to reduce the number of seats in the Diet, and to make meaningful cuts to public servant’s pay and cut staff levels in the public service, including public corporations. They need to do things like placing the head office of the National Recovery Administration in the North East of Japan rather than in Tokyo – to change the organization of the entire country.

Major surgery should be a one-off event

I became president of Komatsu in 2001. At the time, the recession had been dragging on forever and everyone was doing it tough. At Komatsu, we were trying to come to terms with the biggest loss in the history of our company. I don’t want to sing my own praises, but I turned this company around and put it into the black within one year.

When a surgeon is faced with a seriously ill patient, any major operation has to be rapid and one-off, otherwise the patient won’t make it. My argument is that the same principles apply when it comes to reforming a company. You have to aim for growth while cutting costs at the same time. You call for voluntary early retirements, and treat everyone transferred to a subsidiary as an employee of the subsidiary rather than an employee of main company. Review everything about the business activities of the company, right down to the last box of business cards. You do all of these things. You can’t overcome a crisis by leisurely waiting for waste to be eliminated before thinking about growth strategies.

I’d like to explain four key concepts that were the pillars of these business reforms.

First was the thorough implementation of visualization of the situation that Komatsu is in. This allowed all employees to share a common understanding of exactly where our problems were located.

The second key concept was to think about growth and costs separately. Growth advocates tend to think that it doesn’t matter if a measure to improve growth costs money, because the increase in sales will absorb the additional costs. This kind of thinking is overly optimistic. For growth areas, selection and concentration – investing resources while simultaneously cutting unnecessary costs – are precisely what is crucial.

When it comes to cutting costs, I’m not talking about the kind of story you often hear in Japan about reducing the costs of components right down to the last screw – there are plenty of far more wasteful expenditures that can be cut. Specifically, I’m talking about the fixed costs incurred by the back office departments of the head office. These costs need to be radically reviewed.

For example, Japanese manufacturers have tended to stick to a principle of self-sufficiency when it comes to IT systems, but they would be better off sticking to off-the-shelf products, particularly when it comes to head office departments. This is because it makes it easier to work all around the world, while also restraining costs. Unless office work is designed on the assumption that, globally, people change jobs frequently, people won’t be able to work effectively when they start a new job.

Another major fixed cost is personnel costs. In that sense, the Japanese system of lifetime employment has a lot to answer for. In other countries it’s regarded as common sense that economic conditions go up and down in cycles and so adjusting employment levels accordingly is a no brainer. But in Japan employment has been turned into a sacred cow, so that letting a worker go once he’s been employed is almost sacrilegious. The result has been that staff are employed during boom times, and then when there is a downturn a new subsidiary is created on the pretext of ‘business diversification’ in order to provide work for surplus personnel. Once the core business becomes busy again, more people are hired. Repeat this a few times, and you end up with a whole heap of unprofitable subsidiaries.

When I took over as president, I decided I’d had enough. I reorganized 300 subsidiaries so that two years later we had 110 less. I also sent letters to 20,000 employees calling for voluntary early retirement.

Some managers cut wages by ten percent across the board, but I didn’t. That’s because cutting wages without touching staff levels doesn’t produce a sense of crisis. Instead, a dependent kind of attitude starts to take root, as people assume “They’ll probably restore our wages once conditions improve again.”

As a manager, this is extremely painful, but unless you go all the way and address staff levels then you don’t get a sense of crisis. At Komatsu, we were able to restore the company’s financial health, so that now we can employ even more people than we did back then.

By the way, when I say ‘growth areas’, geographically I’m talking about Asia, and in terms of technology I mean competing with environmental, safety and information communication technologies. I may have cut fixed costs, but I wasn’t frugal with the research and development that cultivates our manufacturing competitiveness.

The third key concept is to not constantly debate our weaknesses. Our strengths are clearly in the area of manufacturing, so that’s where we should be competing. I use the phrase “second-to-none product”.

One of the reasons why Komatsu struggled is because we got caught up in a discounting battle, partly due to the effects of deflation in Japan. In Japan there are many players in each industry, and so as soon as economic growth stops all companies engage in excessive competition out of a desire to sell even just one more product because they need the work, and so prices drop lower and lower. This kind of war of attrition is peculiar to Japan, and the more it goes on the more deflation continues.

In 2001, demand for construction equipment had dropped by about a third compared to the peak of the bubble, but I declared that we would not worry at all about market share and increase prices instead. In the ten years since then we’ve boldly raised prices by fifteen percent. This has resulted in a huge improvement in profitability, and other companies have even copied us. Of course, the precondition for being able to do this is to have a “second-to-none product” – something to offer with high added value.

The fourth key concept is, as I said earlier, the idea that major surgery – restructuring in this case – should be a one-off event.

I believe that these four key concepts can be directly applied to this country. The kinds of issues that we had to deal with at Komatsu are basically the same kinds of issues that Japan faces now.

Let’s start with visualization. The government has announced its “Comprehensive Reform of Social Security and Tax”, but I doubt the general public has any clear vision of the critical nature of this country’s finances. To begin with, of the roughly 90 trillion yen in [the general account of] the national budget, the government paying roughly 21 trillion yen in interest payments every year as a result of the massive government debt, and social security payments are also increasing by a trillion yen every year. This level is so high that even increasing the rate of consumption tax by 5%, while not totally pointless, is not going to close the gap. For social security too, unless the government is up front and says “I’m sorry but we can’t increase social security any further, please make do with the current amounts”, then they will never be understood correctly. Prime Minister Noda is a good public speaker, and so he needs to explain the situation himself, in a way that is easy for the people to understand. I don’t think the reforms can succeed if he rushes that process.

Don’t assume that the existing way of doing things is rational

With respect to the second concept of making back-office departments more efficient, the government faces a huge problem. The IT systems used by the national government and local governments seem to use very different. At Komatsu we are prone to the same kinds of issues, but the real problem comes in at the point where IT systems are built on the assumption that the existing way of doing a task is rational. It really should be the other way around – they should have a good hard look at whether a particular task is really necessary before building an IT system to do that task. Once an activity has been digitized, the opportunity to eliminate waste is lost forever. That’s why I say that we should eliminate inefficiency whenever there is a chance to wear ‘ready-made clothes’.

The same can be said of employment. In the same way that companies have established subsidiaries haphazardly, the national government has produced huge numbers of public corporations and other organizations as destinations for retired bureaucrats to “descend from heaven” (retire from the bureaucracy into lucrative jobs in private or semi-private corporations). When the government reviews and prioritizes its various programs, each individual program gets reviewed, but there is no debate whatsoever about what to do with the people working on these programs. There is no way that this approach will produce any results. That’s because invariably these people will always come looking for other work. Prime Minister Noda is also talking about reducing the salaries of public servants but he still hasn’t gone as far as talking about reducing the actual number of public servants.

When it comes to growth, I am keenly aware of the impoverishment of regional economies in Japan. Surely this is a negative consequence of excessive concentration in Tokyo. Komatsu was originally based in Ishikawa Prefecture, but during the bubble era our image as an Ishikawa company made it difficult to attract talented staff, and so we opened a head office in Tokyo as a façade. But now days we have no trouble employing people. The real problem that we face now is that the environment in regional Japan is not suitable for manufacturing exports. For example, when we tried to ship products to the world from Kanazawa Port via Pusan, we found that the upgrades necessary for large container vessels to enter and leave the port had not been made. As a result of our announcement in 2005 that we would build a plant at Kanazawa Port the Ministry of Land, Infrastructure, Transport and Tourism and the local authorities did actually respond as you would expect, but this is just one example of the sort of thing that happens all the time. At Komatsu we are now moving head office functions such as the training department and procurement headquarters back to our plants in Ishikawa Prefecture.

The national government has allocated budgets to the regions on the principle of national uniformity, but I think there has been an awful lot of waste. Surely if the national government could give the regions money and let them decide what to do with it then this would lead to a revitalization of regional economies.

The important thing is that these “major surgeries” must all be carried out at the same time. After he announced an increase in the rate of consumption tax, Prime Minister Noda then started talking about public servants’ pay and the number of seats in the Diet, but these things should have been announced at the same time. It is precisely by doing everything at once that a sense of crisis emerges in politicians and the general public.

Economics is the essence of politics

The two characters in the Japanese word for “economy” (経済) appear in four-character Chinese idioms such as 経国済民 (jing guo ji min) and経世済民 (jing shi ji min), both of which mean “to save the people by saving, governing and managing the nation.” This is precisely what politics involves.

Mr. Noda is the third prime minister since the DPJ came to party, but I think he is the most reliable. He has received criticism from both inside and outside the party, but he is handling the government with conviction, and the young leaders of the party and the government include many politicians with promising futures who are supporting Prime Minister Noda to seek total optimization.

Originally this was the role of the LDP, but these days they seem to be tending towards the position of partial optimization, perhaps out of reserve given their status as the standby party that lost the last election. Naturally, I hope that there are also quite a few LDP Diet members who aren’t truly satisfied with this in their heart of hearts, but if so we aren’t hearing much from them.

There is also a view that there needs to be a general election before tackling the issue of consumption tax. Indeed, surely an election would be a good opportunity to “visualize” the problems that Japan is facing. This would mean that Prime Minister Noda would have to explain his policy to the people in various contexts, and that the LDP would be forced to decide on a position. However, what I fear more than anything else is the disappointment of the international financial markets if an election is held and the Japanese people reject any increase in the rate of consumption tax.

Be that as it may, it is perhaps a little unfair to heap all of the responsibility on to politicians. This is because if we take politics and economics as two sides of the same coin, then we can also say that it is precisely economic stability that produces political stability. I think the reasons for the recent economic growth in Asia can found in the political stability of this period.

Given twenty years of economic stagnation, it’s no wonder that people are unhappy no matter how many times the prime minister changes, and that politics is in disarray. No matter how much taxes are raised, if the economy does not grow then sooner or later the country won’t be able to pay its way. We are currently caught in vicious cycle where one round of deflation gives rise to another round of deflation, and not only do we need the national government to create growth opportunities, there is also a need for private companies to transform their thinking.

Looking at Japan from a manager’s perspective, the people can be thought of as employees who are all in the same boat as you. Naturally, the pain has to be shared among the employees as well. When I became president of Komatsu in 2001, I told everyone that “While it is true that the fact that Komatsu is in this situation is the responsibility of the managers, everyone is to blame. You need to think that there was something that you could have done.” Similarly, we can’t overcome this situation unless everyone in Japan plays an active part.

It’s a cruel way to put it, but the days when everyone could receive good fortune unconditionally are over. We need to show firm resolve before we become “boiled frogs” that have lost the power to jump out of the pot.

Raising taxes while ignoring the psychology of the people will not succeed

Suzuki Toshifumi (Chairman of Seven & I Holdings) interview by Demachi Yuzuru
Photo : Suzuki Toshifumi
Suzuki Toshifumi

There is something I would like to make clear at the outset. I am not of the opinion that consumption tax should never ever be raised at any point in the future. Nor am I one of those people who are categorically opposed to the idea, not wanting to pay consumption tax no matter what. Considering the state of the finances of the Japanese government, I believe that there will be no choice but to raise proportion of indirect taxes.

Nevertheless, I am unable to support Prime Minister Noda’s plan to increase the rate of income tax, as set forth in “Comprehensive Reform of Social Security and Tax,” unless the necessary preconditions are met.

Let’s take another look at the situation in which we find ourselves.

When consumption tax was introduced in 1989, and again when the rate was increase to five percent in 1997, consumer spending slumped in both cases. Looking at the sales data for the retail industry we can see that the size of the drop was particularly large in 1997 following the collapse of the bubble economy. I have grave misgivings as to what might happen if we simply increase the rate of consumption tax in an environment with far greater risk factors than during previous increases. I think it is a realistic possibility that we will see a slump in the willingness of consumers to spend, resulting in a deterioration in corporate earnings.

It is difficult to make sales domestically within Japan at the best of times, and so industry is already being hollowed out as most manufacturing bases relocate overseas due to the imperatives of economic rationalism. Increasing the rate of consumption tax also increases the likelihood that we will face a chain of negative events – a further deterioration in the domestic economy, followed by reduced consumer spending, higher corporate bankruptcies, and an increase in unemployment. We may even find ourselves trapped in a situation where total tax receipts, including income tax and company tax as well as consumption tax, actually falls.

To be sure, in Europe the credit ratings of government bonds are now a problem, due to the public finances of several countries. Japan also has massive government debt, and so everyone is concerned that Japanese bonds might be the next to be downgraded. Of course, this is not a problem that we can shut our eyes to, but there are many things that should be done within Japan first. My view is that the argument that we should overreact to the European crisis by raising the rate of consumption tax is a little simplistic. Japan has built one of the most blessed economic systems in the world, and so can be described as conservative in terms of consumption psychology. This psychology is easily influenced by changing circumstances. The whole sequence of arguments in favor of raising consumption tax strike me as no more than a crass political action that completely ignores this consumer psychology.

So, when I said a moment ago that there are “things that should be done”, what specific kinds of policies did I have in mind? Examples include reforming the government and the bureaucracy, such as reducing the number of seats in the Diet and reducing the salaries of public servants, as well as system upgrades, such as introducing a Tax File Number system and an invoice system, and establishing strategies for escaping the deflationary spiral and fostering economic growth. Then the government should explain what they want to do to the people, and there should be a general election contested over the issue of consumption tax, in order to refer to the decision to the referee of public opinion.

At the moment, 95% of Japanese government bonds are held domestically within Japan. This is completely different to the situation that Greece and Italy find themselves in. We still have the time and ability to come up with measures of our own choosing. Furthermore, if the government can implement the kind of policies I just mentioned in rapid succession then, with public opinion on their side, surely the government will be able to win the trust of the markets, as symbolized by credit ratings. In other words, Japan will be regarded as properly addressing the budget problem.

Making sacrifices as an example to the people

There are currently all kinds of draft plans for reducing the number of seats in the Diet. However, I don’t think that the kinds of cuts that the DPJ are talking about can possibly win over the people of Japan. Another area in which I feel that they have put the cart before the horse is in waiting for a month to pass after they started talking about increasing the rate of consumption tax before starting to talk about reducing the number of seats in the Diet. To the people, this will look like no more than posing, an attempt to appear to be doing something just because someone said that they should. I want to see them show real political nerve, with the kind of speed and scale that will convince the Japanese people of the necessity of what they are trying to do.

As far as lowering the salaries of public servants in the national bureaucracy, the government needs to show real leadership and come up with a bold plan to noticeably correct the disparity between public and private sector salaries, instead of the seven or eight percent cuts that they are talking about now.

The same can be said of companies, but old organizations do not change easily. Attempting to make these kinds of changes is the primary role of politicians as leaders. Politicians should be agents of change, not just with lip service, but with real action. The same is true of public servants. Surely it is through these kinds of concrete actions that the outlook of the Japanese people will gradually change.

Perhaps cutting the annual expenditures of Diet members and the salaries of public servants will, in and of itself, only make a tiny contribution towards addressing the financial situation of the Japanese government. However, the objective here is to urge the Japanese people to show their resolve, by first making sacrifices as an example to others. Can we really expect the people to give their consent to higher taxes if politicians and bureaucrats are seen to be colluding in comfort?

Another important point to bear in mind when considering the tax system is tax payers’ sense of fairness. However it is quite obvious that the current tax system fails to collect taxes fairly and correctly. It is common knowledge that some companies and individuals are avoiding their obligation to pay tax. The tax burden must be spread widely and fairly, by introducing a Tax File Number system and an invoice system. Surely these kinds of measures could be expected to raise a considerable amount of tax revenue by increasing the effectiveness of tax collection, even without raising tax rates. The government needs to properly address the structural problems with the tax system before they raise the consumption tax rate. The kind of linear logic that simply says “Government finances are in serious trouble so we need to increase taxes” does not make sense.

I think the Japanese people have always had a high level of community spirit. For this reason, I think if politicians fulfill their true role and sincerely explain the situation to the people, then I am certain that the people will be sympathetic. So far politicians have neglected to make this kind of effort, and so there should be no surprise that public opinion is generally opposed to increasing taxes. Even if the people are unimpressed with the DPJ administration, this does not mean that they are particularly optimistic about the LDP.

In this sense, I believe that the political awareness of the Japanese people is based on their experiences so far, and that they are looking dispassionately at the actions of politicians from now on, as they form their judgments.

Therefore, the government should first establish the direction for a sequence of reforms, and then seek the confidence of the people by taking the questions of taxes and government finances to a general election. I would like to see the leaders of by the DPJ and the LDP stand at the helm and debate these issues as reformers.

Moving our attention from politics to the business world, most people in financial circles support increasing consumption tax. When I say “Increasing consumption tax is premature – there are things that should be done first”, such claims will probably be regarded as not understanding the real situation of the Japanese economy. But the fact that tax revenue has to increase in order to return government finances to good health is something that even an elementary student can understand. If only it were so easy! What I want to say here is that I think that what is missing are ideas about how to establish the procedures, and time scale for doing so.

When it comes to broad debates about “macroeconomics”, most of the voices that receive attention in the media are from large companies, and most of these are from people from sectors that have no direct point of contact with consumers. However, there is a tendency to forget that it is ordinary consumers – the people of Japan – that actually pay consumption tax. For the last fifty years, I have been involved in the retail sector, with convenience stores, supermarkets, and department stores et cetera, so my field of business has been one constant contact with consumers. As a result of this experience, I have come to believe that it is not possible to talk about taxes without talking about consumer psychology. This is because Japan is a mature economy, whose population is aging at a faster rate than in any other country, and so Japanese people are particularly sensitive to paying tax.

Let me explain on the basis of actual observations. When the consumption tax rate was increased to five percent, we held a “5% consumption tax refund sale” at Seven Eleven and Itoyokado stores. Except for a few things like coupons and tobacco, we reduced the price of everything in the store by five percent. I remember that initially there was a lot of objection to the idea within the company, with people saying that a five percent discount wouldn’t make any difference. At the time we often held sales offering 20% or 30% off, so people felt that a discount of only 5% would be meaningless. Personally, I wanted to hold the sale simultaneously all around Japan, but opposition within the company was so strong that I ended up giving the instruction, “If you guys object so strongly, then start by holding the sale just in Hokkaido.” This was just after the Hokkaido Takushoku Bank had collapsed, and the local economy was in the doldrums. So we held then sale, and sales turnover was 75% higher than for the previous year! We hastily extended the “5% consumption tax refund sale” to the rest of Japan, with the same results. Normally if we hold a “20% off” sale, the best we can manage is a about a 20% increase in sales. I’m digressing a little, but afterwards many companies copied us, holding similar sales all over the place.

What this means is that I have an intuitive sense of the way that Japanese people react to consumption tax with a far great sensitivity than one would expect based on the numbers involved. For office workers, income tax is deducted from their pay, and so they are not usually very aware of the fact that they are paying tax. But consumption tax, on the other hand, is much more obvious and immediate, because the amount of tax is clearly stated on the receipt whenever you buy anything. Consumption tax rates of 20% may well be par for the course in Europe, but if someone suggests that this means that the same kind of system can be immediately adapted to Japan, well, it is doubtful whether they really understand the national characteristics of the Japanese people.

Politicians who cannot understand the psychology of the people

Consumption is intimately connected with psychology. This has been my personal view for quite some time. I have always said that it is meaningless to hold an event without properly understanding the human psychology of the moment.

Let me give you another example. We once held a cash back sale, where we asked customers to bring their shopping receipts to another part of the store where they could receive cash back to the value of up to 20% of what they had spent. The reaction to this event was completely different to a normal 20% discount. Mathematically or logically speaking, there should be no difference, but the difference in consumer behavior was plain to see.

Similarly, politics is impossible without considering human psychology. Really, politicians should have a better understanding of the mindset of the people than anyone else, because they are selected directly by the people at elections. However, at some point we ended up with a majority of politicians that are unable to comprehend the psychology of their constituents.

If the rate of consumption tax is increased, the people of Japan will pull their purse strings tight as they adopt a defensive survival mindset. People will stop spending, and so the economy will grind to a halt. I think the arguments in favor of increasing consumption tax that are current in political and financial circles are no more than theoretical calculations that completely neglect these kinds of psychological aspects of the Japanese people.

I want people to understand that, considering the state of government finances, I actually support the thesis that the rate of consumption tax should be increased. However, a precondition for this is that the majority of tax payers agree with this when it comes time to carry it out, but right now they are not even remotely convinced. In this kind of situation, even supposing that such an increase could be forced through by the politicians, unless the people can have confidence in their future prospects they will, naturally enough, resist the change by holding back on consumption. The result will be that the economy becomes steadily more impoverished.

In age of material abundance, with a very mature economy and a perfect buyer’s market, the challenge that we constantly face is that of consumer psychology.

It is said that the market for convenience stores in Japan is already saturated, but I think that there is still room to open new stores. One of the reasons why the sales turnover for the Seven Eleven convenience stores is still growing is because we are releasing new products based on a solid understanding of consumer psychology.

As the population continues to age, people will find it increasingly inconvenient to travel long distances to go shopping. This turns out to be a great business opportunity for nearby convenience stores. Similarly, the population of Japan is decreasing, but the number of households is increasing steadily as the number of people per household decreases, and so people will only need to buy small amounts at a time. That’s why at Seven Eleven we are taking items that until now people have bought at supermarkets, such as side dishes and perishables, and putting them into smaller packages at affordable prices.

“From the customer’s standpoint”

Politicians need to make managerial efforts to get a handle on the psychology of the Japanese people.

In doing so, there is one area in which they need to take care. At our company, I am always saying that we should never say “for the sake of the customer.” Why is that? This is because I think that hidden within the phrase “for the sake of the customer” is the condescending mindset that we are doing customers some kind of a favor. I think the correct idea is “from the customer’s standpoint”. In this regard, for politicians the people of Japan are like customers, and from the current batch of politicians we occasionally catch glimpses of the “for the sake of the people” attitude.

Raising consumption tax is a bit like increasing the prices of products. For a manager, raising prices is a measure of last resort, and if a company raises prices in the hope of improving turnover without efforts on the part of the company such as increasing the value of the product then it cannot expect the price rise to be well received. The Japanese budget deficit may well be in a critical state, but it is for precisely that reason that there are things that should be done before taxes are raised. Any attempt to rebuild government finances by simply crunching numbers and ignoring the psychology of the Japanese people cannot be expected to be very successful.

With the Great East Japan Earthquake occurring on March 11 last year, this has been a truly difficult year for all of Japan. We are finally beginning to see the first signs of recovery, but our company policy direction for this year is as follows: “The outlook for the long term future remains unclear. While bracing ourselves for a tough year ahead, we will also make this a year of bold new initiatives.” Basically this is saying that the state of the overall global economy will probably remain unclear for some time, that it is genuinely difficult to foresee what kind of influences might emerge, and that our policy direction for this year is to boldly adopt new challenges in a way that allows to respond to whatever changes may come. It really is impossible to read the future. Every year analysts issue their predictions for exchange rates, but it almost never works out as expected, does it?

Responding to changes is something that is easier said than done. In our business affairs, we have a tendency to stick to our past successes. But our customers are always changing and society is always changing. I believe that it is politicians’ job to stand at the forefront of these changes and show the way.

After the interviews

At first glance, our two interviewees opinions on increasing the consumption tax rate appear to be diametrically opposed.

Sakane, the chairman of Komatsu, says that increasing the consumption tax rate by 5% is essential, arguing that the government should raise the rate of consumption tax, the thing that people hate more than anything else, but that they absolutely must reduce the number of seats in the Diet and make substantial cuts to the number of public servants, including public corporations. He stresses that the government should do everything all at once. Sakane argues that the government should cut expenditures and raise taxes at the same time.

These statements are based on Sakane’s personal experience in executing a V-shaped recovery out of a management crisis. After becoming president of Komatsu, Sakane called for voluntary early retirement, and reorganized the company’s subsidiaries. He says he sent each individual employee a letter, calling for voluntary early retirements. He implemented structural reforms that involved doing the kinds of things that he least wanted to do. He also declared that Komatsu would raise its prices at a time when the construction equipment industry was caught up in a price-cutting war of attrition. He managed to raise profitability.

Chairman Suzuki, on the other hand, indicates that he thinks that the rate of consumption tax will need to be increased in the future, but is opposed for the time being. He is concerned that consumer sentiment will worsen as a result of higher taxes. He argues that the economy will stall if the rate of consumption tax is increased while consumers remain unconvinced in their heart of hearts. This is a distinctive position, given that many people in financial circles accept a consumption tax increase, but he is scathing of the arguments of political and business circles in favor of increasing consumption tax, dismissing them as “no more than theoretical calculations that completely neglect [the] psychological aspects of the Japanese people.”

However, both of these men share a concern regarding the Japanese government’s budget deficit. They both believe that politicians should do the things that need to be done.

Last year I published a book called Seihin to Fukko, Doko Toshio 100 no Kotoba (“Honorable Poverty and Revival, 100 quotes from Doko Toshio”). Exactly thirty years ago, in January 1982, when he was serving as chairman of the Second Provisional Commission for Administrative Reform, gave an interview in the Nihon Keizai Shinbun newspaper’s “My Resume” series, where he expressed his fears that Japan might one day be bankrupt: “If we stand by and do nothing, then it is only a matter of time before the outstanding national debt exceeds one hundred trillion yen.”

However, this hundred trillion yen barrier now looks set to become one quadrillion yen (one thousand trillion yen). In the space of thirty years, an extra digit has been added. This level of government debt is unprecedented in all of history. During this time, the politicians were quite clueless. They kept their eyes firmly shut to the ballooning debt resulting from increasing social security payments and so on.

The Doko Commission produced some significant results such as major reforms to Japan National Railways, but was unable to stop the momentum of expanding budget deficits. Perhaps the expression “the lost two decades” is apt. Can we close the books on this era this year? The resolve of our politicians is in the spotlight.

Translated from “Keieisha shohizei daironso — ikkoku no yuyo mo nainoka, zozei no maeni yarukoto ga aru (Top Managers Debate the Consumption Tax Issue — No time for delay? Or are there things to do before taxes are increased?)”,’Bungeishunju, March 2012, pp. 164-175. (Courtesy of Bungeishunju Ltd.)

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