Thursday, August 10, 2006

I agree with everything except your main points

I am a big fan of William Pesek's work, largely because of his strict but cynical orthodoxy.

However, I do not think he gives the Japanese people or Japanese policy makers enough credit in this recently published column.
Japan's next prime minister needs to answer many questions

2006/8/8 - By William Pesek - Few elections may be more pivotal for global markets than one happening in Tokyo next month.

After more than five years of shaking up Japan's economy, Junichiro Koizumi is stepping down. Oddly, global markets seem to be paying scant attention to one of the most important power shifts in the modern history of the No. 2 economy.


There are scores of questions investors should be asking Japan's next prime minister, whether it's Chief Cabinet Secretary Shinzo Abe, Finance Minister Sadakazu Tanigaki, Foreign Minister Taro Aso or someone else. Here are four key ones.

1. What about the debt? "The most pressing challenge is regaining sustainability in the public finances," International Monetary Fund Managing Director Rodrigo de Rato said in Tokyo on Aug. 3. "We urge policy makers not to be overly optimistic about what can be achieved through spending cuts."

Or economic growth. While de Rato's comment was right on, officials in Tokyo also seem to think Japan's recent growth will reduce debt. The 2 percent expansion the central bank expects next year won't be enough to do that.

It hardly helps that the Organization for Economic Cooperation and Development estimates Japan's debt burden is 170 percent of gross domestic product, the largest in the industrialized world and bigger than the government claims. Not only is debt holding Japan's credit rating below Botswana's, but a "crowding out" dynamic is making it hard for healthy companies to issue debt to expand.

2. How about more babies? Japan's population actually shrank in 2005 thanks to a declining birthrate in a country where a fifth of the people are already 65 or older. Japan needs to figure out how to pay lower debt-servicing costs -- which now eat up 20 percent of the budget -- so it can pay for rising social- security costs.

Part of the issue is tackling discrimination against women in the workplace. While things are improving, motherhood remains a career-ending proposition for all too many women. Underutilizing the female workforce not only holds back growth, it also means women will increasingly delay childbirth. Without action, the labor pool will dry up further.

3. Will you leave the BOJ alone? An ominous suggestion came last week from Hidenao Nakagawa, head of the LDP's policy-making board, who said Japan's next leader should look for ways for the Bank of Japan and the government to cooperate more to boost growth.

You really have to wonder how independent a central bank that lowers interest rates to zero really is. After all, if politicians had done their part 10 years ago to deregulate the economy and boost employment instead of relying on free money, the 1990s wouldn't have been a lost decade.

Investors should be very afraid at the mere suggestion the BOJ could be any more helpful to politicians. It's imperative that Japan's next leader leave the BOJ alone and focus instead on repairing the nation's fiscal position and tweaking tax policies to make the economy more productive.

4. Whither Japan's role in Asia? It's a simpler question than it seems and it may boil down to one thing: Yasukuni Shrine.

It's just as sensitive an issue in Japan as outside, but few topics will say more about how connected the economy will be to Asia's economic rise. Sixty-plus years after World War II, Japanese want to move on. Visits by top Japanese officials to Yasukuni, which honors 14 war criminals among the dead it commemorates, are increasingly unnerving China and South Korea.

First, about the debt. Call me a simpleton (Editor: "MTC, you're a simpleton.") but I somehow cannot get extraordinarily excited about it.

As far as I understand it, the national debt is a debt the Japanese largely owe themselves. There is no incentive for ever calling the debt, as it can only be paid immediately through domestic tax increases, which will send the economy into a tailspin. Nobody wants to kill the economy to collect on a debt, so long as interest rates remain low, the debt will just get rolled over every time it comes due, and the government will pay off the interest.

Second, about babies. I know citations of anecdotal evidence are as good as the numbers backing them up--but I swear I have seen more women enceinte this summer than I can recall seeing for a very long time. Something about a stabilizing work environment making women (and on occasion, their male spouses) willing to take time off to produce a generation of future taxpayers, then being able to return to their old positions, without jeapordizing their careers.

Third, about leaving the BOJ alone.

Not if one value one's livelihood--and everybody else's, one shouldn't.

Sweet William, alas, you knowest not into what brambles into which you tread.

Nakagawa Hidenao is an old Nikkei Shimbun guy--he knows a thing or two about how the Japanese economic system really works. Or fails to work, as the case may be.

The Koizumi years have been in a time of unprecedented government control over the Ministry of Finance and the BOJ...especially after the Bank rid itself of the Most Supreme and Excellent Lord of Bitter Chastisement Hayami Masaru -- the consensus "Worst Central Banker in the World" for four years straight. Naming Tanigaki Sadakazu Minister of Finance also has to be classed among Mr. K's masterstrokes. Truly a file-and-forget move of extreme prejudice--nothing else was needed to leave the MOF quietly, painlessly and effectively emasculated.

Looking back, it was sweet little operation Mr. K & Co. had going.

Nakagawa, however, sees an end to this happy Gelded Age of government fiscal and monetary policy in the next Cabinet. A replacement for Tanigaki (whose political career will go on extended holiday or indeed be over as of September 20) will have to both offer red meat to his hounds in the Ministry while simultaneoulsy whipping the legs of the BOJ from time to time--this in order to keep the Governors from following through on their obscene lust for monetary normalcy.

My guess is the role of the heavy will be played by Yosano Kaoru.

As for Yasukuni, don't get me started on on that, just don't get me started!

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