The ruling Democratic Party of Japan is compiling a supplementary budget in excess of ¥4 trillion to head off the growing risk of a slowdown in the recovery. The plan is, however, a prime example of “too little, too late.” If the DPJ had had its act together, it would have had the supplementary budget ready by July, before it began preparing for the September 2010 election of the party’s president. That would have enabled the administration to get the measure passed by the National Diet in August, and implementation of the required stimulus would already have begun by now. As a result of its overly rosy view of the economy’s prospects, the DPJ has laid itself open to the charge that it allowed the contest for party president to get in the way of action it should have taken on the economic front.
In addition to being too late, the proposed ¥4 trillion in stimulation is too little to offset the risk of a slowdown. To make matters worse, the revenue sources for the supplementary budget are suspect. The administration has announced that in addition to drawing on the surplus from the settlement of accounts for fiscal 2009 (April 2009 to March 2010) and unused government bond funds, it will make use of increased tax revenue for fiscal 2010, which it expects to be greater than originally anticipated. That, though, is counting chickens before they are hatched. What will happen if corporate tax revenue moves down this fiscal year instead of up? Spending money to implement the extra budget makes sense, but the financing would in that case be inadequate. Despite its efforts to avoid heavier reliance on deficit-financing bonds, the government would wind up issuing more of them.
In April 2009, when the Liberal Democratic Party was still in power, it unveiled a record-breaking supplementary budget of ¥15.4 trillion. The LDP’s aim was both to head off a double-dip recession and to implement a medium- to long-term growth strategy, thereby getting Japan back on track to solid economic growth.
The short-term stimulus featured tax breaks and subsidies for the “eco car” program and incentives for purchases of energy-efficient home appliances under the “eco points” program. These are measures that encouraged consumers to move spending plans forward, but while they boosted consumption for a while, they are not suited to long-term implementation. This is a point that received attention when the eco car subsidies were terminated in September this year. We were aware of this limitation from the start. Recognizing that a growth strategy for the longer term was also essential, we earmarked about a third of the ¥15.4 trillion package as a supply of funds for various measures designed to give birth to new industries and invigorate competition in existing industries.
I might mention, for instance, the School New Deal concept. This is a scheme for public schools aimed at accelerating the reinforcement of buildings to make them earthquake resistant and at promoting green renovations, such as the installation of solar power systems. This kind of program prompts makers of solar panels, for instance, to anticipate growth in demand, encouraging them to channel funds into capital investment and hire additional workers. When plant and equipment spending increases, prices fall thanks to the realization of economies of scale, and the lower prices then generate additional demand, initiating a virtuous circle. Our thinking was that such programs would get the economy back on its feet.
Then, however, the Democrats moved into power in September 2009. Seeking to follow through on the DPJ’s campaign manifesto for the August House of Representatives election, the new administration began whittling away at funding for longer-range programs like the School New Deal, arguing that they were a waste of money and pork-barrel politics. But what this course shift led to is the current economic slump. This, I must say, is an extremely regrettable result.
Agriculture provides an apt illustration of how the DPJ has lost sight of the big picture and adopted foolish policies. One element of the LDP’s strategy for long-term growth, which we adopted in the spring of 2009, was a bold program of farmland reform for the current Heisei era (1989- ). Japan’s agricultural productivity needs to be improved by putting farming in the hands of those willing and able to engage in it. Toward this end, we proposed paying subsidies to families who lease their farmland to others and relaxing the regulations on the entry into farming by companies. This would have led to fundamental strengthening of agricultural operations. As the agricultural sector’s ability to survive in international competition improved, the government would have been able to respond more positively to calls from other countries for the establishment of free trade agreements.
The Democrats, however, promptly axed this Heisei farmland reform. What they opted for instead is a system of income compensation for individual farming households, part of which went into operation last April. At first, in the campaign for the August 2009 lower house election, the DPJ offered the rationale that the system would provide compensation for farmers who suffered a temporary loss of income as a result of the conclusion of free trade agreements. This provoked an outcry from farming families that are fearful of liberalization, however, and the Democrats quickly backed away from their push for FTAs. As a result, the income compensation scheme became nothing more than an arrangement permitting unprofitable farms to continue bleeding red ink. Naturally there has been no progress toward patching together larger farms from the countless tiny plots scattered here and there, and productivity has failed to improve.
At present the DPJ is at work on four pork-barrel programs, of which the income compensation for farming families is one. The others are the schemes to provide child allowances, make high school education free, and eliminate tolls for expressways. The party apparently thinks it can stimulate demand by putting money directly into the hands of families, but taxpayers will have to bear an additional load to provide the necessary revenues. Money will simply circulate more vigorously back and forth between households and the government, with no impact on economic growth and no progress in restoring health to public finances.
The Democrats are, moreover, pursuing a number of unnecessary economic measures that will obstruct Japanese companies. These are what pundits have labeled the “three-piece set of antibusiness policies.” One is the plan to make a 25% cut in greenhouse gas emissions by 2020, which the administration decided on without consulting the public; another is the overly hasty move to hike the minimum wage; and the third is the drive to prohibit staffing agencies from dispatching temporary workers to the manufacturing sector as a general rule. This set of measures practically says to corporate managers, “Please stop manufacturing in Japan.” In addition, the strengthening of the yen, which began climbing rapidly this summer, is also discouraging manufacturing in Japan. Major corporations have not been fazed, since they can make adjustments through their overseas operations, but smaller companies are running into trouble. If the yen continues to ride high and small businesses start going bankrupt in succession, the households the DPJ has promised to take good care of will also suffer.
On September 15 the government and Bank of Japan intervened in currency markets for the first time in six and a half years. The DPJ’s choice of this timing caused jaws to drop, because it was just one day after Prime Minister Kan Naoto was reelected as president of the DPJ. Ordinarily one would expect intervention timing to be based on some objective standard, such as when the average anticipated exchange rate of companies reaches a certain rate. Ultimately the intervention had no effect, as the yen remained strong, and at present the developed countries have joined in an exchange-rate battle, each seeking to weaken its own currency. In such a setting, unilateral intervention by Japan cannot be expected to have much impact.
Henceforth Japan should take the high road in the international community, arguing that the use of currencies as a weapon in economic warfare is not good for free trade. It should take the lead in arranging for coordination of macroeconomic policies, including coordinated intervention in currency markets. It should march forward with a banner announcing that the time has come for a new version of the 1985 Plaza accord on currency realignment. To be sure, close collaboration between Tokyo and Washington would be indispensable for success. But given the way Japan-US ties have turned cold since the DPJ administration took over, there seems little chance of that.
While competing to weaken their currencies, the developed countries are also engaging in rivalry to reduce corporate tax rates. Japan’s effective rate is above 40%. Along with the rate in the United States, it is one of the world’s highest. The DPJ administration has set a target of cutting the rate by 5 percentage points in fiscal 2011, but such a small cut is unlikely to do much toward improving the competitiveness of Japanese firms.
About ¥1 trillion in additional revenue will have to be secured to finance this modest 5-point reduction in corporate taxes. Some members of the DPJ administration propose that this be accomplished by reducing or eliminating certain preferential tax measures for companies, schemes that help to attain such policy objectives as increasing capital investment. Taking this course, though, would not make a bold statement. Furthermore, inasmuch as the existing preferential corporate tax measures as a whole amount to only about ¥2 trillion, they would have to be radically revised to pay for the 5-point tax cut. Deep slashes would have to be made in the tax breaks for naphtha (an intermediate product in petrochemical production) as well as those that promote investment by small companies and spending on research and development. Cutting the corporate tax rate will have little effect if tax breaks are diminished or terminated at the same time. One does not get a sense that the DPJ’s approach to taxes is grounded in strategic thinking.
The Liberal Democrats, by contrast, advocate a bolder reform. We think corporate taxes should be lowered all the way to the international level, which is under 30%. Some of the funds for paying for this could be secured by reducing personnel expenditures for the 300,000 national civil servants (excluding members of the Self-Defense Forces), and the pay of local civil servants, who number about 3 million, could also be trimmed. The Democrats, too, have mentioned the possibility of reducing expenditures for national government workers, but they have studiously avoided saying anything about how those working for local governments should be treated. This is probably because they do not wish to ruffle feathers in Jichirō (All-Japan Prefectural and Municipal Workers Union), one of their most powerful support organizations.
To illustrate the difference between the economic policies of the DPJ and LDP, I put it like this: “Because it’s raining,” the DPJ tells people, “please take it easy in your homes instead of going outside, where you might catch a cold. We’ll deliver food to your door, and instead of billing you now, we’ll hold off and send the bill to your grandchildren later.” The LDP, by contrast, is saying, “Because it’s raining, we’ll lend you an umbrella. Please go and do your job as usual.” The economy is not something people should expect the government to look after forever. Sooner or later, a real recovery in the private sector must be realized.
During my recent travels around Japan, quite a few people have told me that the problem is not money, since there is enough of it. What is lacking is something to spend the money on. Financial deregulation has enhanced the supply of funds, but business will not turn for the better until the government implements policies that make companies eager to channel funds into capital investment. Toward this end, the authorities must prepare a set of policy measures that can effectively foster new industries and enliven competition in existing industries. This is what could properly be called a responsible economic policy program.
Translated from “Hōjinzei wa omoikitte 20% dai e,” Voice, December 2010, pp. 86-89. (Courtesy of PHP Institute) [December 2010]