Righting What is Wrong With This Country Right Now - A Fantasy

Someone needs to go the Prime Minister, place his/her left hand on the PM's shoulder, look into into his eyes and tell him:

"You know the loss of seats in the House of Councillors' election? It was not your fault. The presence of Minna no To candidates in the districts cost the Democratic Party between five and eight seats. Cooperation between the New Komeito and Liberal Democratic Party -- cooperation that was almost certainly the result of threats that Ozawa Ichiro has been making for years against the numbers of proportional seats in the Diet -- cost the DPJ probably at least another four seats. The reason why Minna no To represented an attractive non-DPJ, anti-LDP alternative in the proportional vote? The accounting crimes of former Prime Minister Hatoyama Yukio's aides and the media pogrom against a single Ozawa real estate deal. That and Hatoyama's inability to take a stand upon anything during his brief tenure.

You need to stop blaming yourself for what happened. You always go overboard in taking responsibility for matters that an objective third party would declare to have been outside your control. As regards the consumption tax you said something tactically stupid but strategically wise.

Laugh off the loss and start cracking the whip.

Oh, and another thing - the Finance Ministry bureaucrats you and Chief Cabinet Secretary Sengoku Yoshito have been relying upon as Japan's ultimate realists? Think of them as Japan's Taliban. Sure it is an unfair and outrageous depiction, but you need an extra strong aversion to their seeming mastery of the numbers. Otherwise you will not lead, you will be led. Minus a visceral negative mindset you will fail to resist their depressed and depressing certitude."

Tuesday Afternoon Reading

For those who were fans of the Katz-Fink dialogue, Shane Baldwin offers over at Forbes.com a digest of the reasons why paranoia about Japan's sovereign debt is unnecessary, if not indeed shameful.

Over at The Economist, Banyan (in one what seems to be one of his last columns under his assumed identity) consults the research of Dr. Alexis Dudden in order to answer the question: "Why do we have a mid-summer national holiday celebrating The Sea?" As one would expect, it is not all salt, sun and fun...nor much respect for the mother of us all.

Tsujimoto Kiyomi Shocks the SDP and Japan's Political Establishment*

Tsujimoto Kiyomi has never been one to avoid the spotlight. Bursting into the national consciousness with her infuriated attempt to pin down former Prime Minister Koizumi Jun'ichiro into answering a question -- her shouted "Sori! Sori! Sori!" becoming something of a national catchphrase -- she later astounded all by getting caught with a ghost employee on her tiny staff -- a crime for which she was arrested, convicted and given a suspended sentence. Then, despite the supposedly lifelong scarring a conviction of a crime usually inflicts upon a person, she did the one thing she knew how to do: run for national office, most recently winning the Osaka #10 district seat in 2009 -- becoming one of the few of members of the Socialist Democratic Party to hold a district rather than a proportional seat.

Last night, Tsujimoto shook the party and the political realm with talk of leaving SDP. For the party, her departure would be a public relations disaster: aside from party leader Fukushima Mizuho, Tsujimoto is the party's most recognizable politician. She is frequently partnered with the local candidate on party political posters -- possibly even more often than Fukushima herself. The party also went out on a limb readmitting her, a convicted felon, back into the party's ranks. SDP Secretary Shigeno Yasumasa, with whom Tsujimoto had her meeting last night, is adamantly rejecting acceptance of her resignation.

However, Tsujimoto is most likely on her way out. Her appointment as Senior Vice Minister of Land, Infrastructure, Transport and Tourism under the Hatoyama Cabinet capped a long fight back to political respectability. Having to surrender her post following the SDP's decision to withdraw from the ruling coalition over Fukushima's opposition to the Futenma-to-Henoko agreement was a bitter pill for Tsujimoto. Normally stoic and sarcastic, she wept profusely and bitterly as she said goodby to her staff at the Ministry.

Tsujimoto's remaining in the party after its withdrawal from the coalition seems to have been conditional. If Fukushima's dramatic dismissal from the Cabinet over the Futenma deal led to a spike in electoral support for the SDP nationwide or for its candidates in the districts, then Tsujimoto would swallow her disappointment and stick with the party. However, on July 11 the party performed disastrously: losing one of its three seats from the proportional list and in all of its districts lost -- even in the Okinawa contest against an LDP candidate who had only recently switched from supporting the 2006 Roadmap to opposing it.

So where does Tsujimoto go after leaving? The eventual natural fit for her is the ruling Democratic Party of Japan. As the first defector to join the DPJ after that party's terrible showing in the July 11 elections and a former loyal member of the Hatoyama government, Tsujimoto would certainly be rewarded with a position within the party well above what her seniority would merit.

A question right now is whether anyone within the ruling party will be insisting on receiving the credit for encouraging Tsujimoto to leave the SDP. Based on a photograph I flagged in September 2007, I can imagine one person who might have a reasonable and quite inconvenient (for the current DPJ leadership group) claim to have been working toward this result for quite some time.

Tsujimoto's defection and likely cooperation as an independent with the DPJ--utnil such time as she could actually join the party -- points out a little remarked reality of the post-July 11 Japanese political world: with 306 seats in the House of Representatives, the DPJ is closer to the two-thirds majority it would need to override actions of the House of Councillors than it is to a coalition producing a working majority in the House of Councillors. In terms of passing legislation the DPJ likes, luring 13 more legislators into cooperation with the party in the House of Representatives seems a far better bet than trying to deal with the standoffish Watanabe Yoshimi's Your Party or the self-righteous New Komeito in the House of Councillors.

* An earlier version of this post had an incorrect acronym in the title line, leading to a host of incorrect versions of the English language name of the Shakai Minshuto.

Monday Morning Reading

What would it make sense to read?

Auslin, Michael - Angsty Allies in The Wall Street Journal.

Harris, Tobias - Toward a New Security Consciousness in Japan? at ANU's East Asia Forum.

Lord, Arthur - Japan’s Defense Establishment in a Post July 11 World: Looking Ahead
at the Mike and Maureen Mansfield Center's website

Schuman, Michael - A Clouded Outlook in TIME.

I know what you are spluttering, "But, that's TIME, the magazine. The purveyors of some of the most egregious garbage on Japan over the last decade!" The article is nevertheless a reasonably solid presentation of what are some chronic problems, best when you can hear the author just about tearing his hair out as he interviews his most obdurate subjects.

Yes, I too wish I had a least one op-ed or article by a woman of the female persuasion to recommend this morning. Women are all over the day-to-day news -- Hiroko Tabuchi, Michiyo Nakamoto, Isabel Reynolds, Sachiko Sakamaki, Anna Kitanaka, Yuri Kageyama, to name but a few -- but are M.I.A. in the commentary department, Sheila Smith being the lonely exception.

Hat tip this morning to Japan Without the Sugar, for pointing me in the direction of the TIME article.

Hikikomori Update - Some Light Upon the Subject

In an attempt to attach some numbers to the nebulous concept of hikikomori, the unknown numbers of persons in between the ages of 14 and 40 that consider themselves cut off from the rest of the world, incapable of leaving their rooms or their homes and in contact with only with members of their immediate family, the Cabinet Office tried conducting person-to-person interviews with 5000 citizens 15-to-39 years of age to ask them about their life habits. The interviewers were able to conduct full interviews with 3287 respondents, a 65.7% response rate.

Of the respondents, 1.79% classified themselves to be full-blown hikikomori, a percentage if compare the national population of the age cohorts in question would indicated a national population of 696,000 hikikomori. In addition to those who categorized themselves as hikikomori, some 3.99% of respondents, agreed with expressions such as "There are times I too want to lock myself away" -- making them seeming candidates for a transition to hikikomori status.

However, when one drills down into the numbers, the actual population of the classic hikikomori, of persons locked inside their rooms, being brought meals and leaving only to visit the bathroom, seems insignificantly small.

Total respondents agreeing with the following:

"I hardly ever leave my room" 0.12%
"I do not leave the house" 0.09"
"I will make occasional trips as far as local convenience store" 0.4%

Adding all these up to a more more narrow definition in line with the popular image of the hikikomori, the government finds a less staggering 236,000 hikikomori, only a tiny fraction of whom are living truly hermetic lives. It is only by adding the above to the 1.19% of the respondents who say, "I go out whenever I need something that helps me pursue my hobbies" that one reaches the 1.79% fraction.

As to why the 1.79% respondents fell into their hermetic lifestyles, 23.7% said, "I got sick" or "I just couldn't fit in at work;" 20.3% said, "My work search did not go well;" 11.9% said, "I stopped attending (elementary, junior high, high) school;" and 6.8% said, "I did not fit in at college."

In the breakdown in the sexes of those classifying themselves as hikikomori, men outnumbered women 2-to-1 (66.1% to 33.9%). As to the age cohorts, 33.9% of the self-identified hikikomori were in their teens, 38.9% in their twenties and 23.7% in their thirties.

Interestingly for those who would seek to reduce the number of hikikomori were the percentages of persons who seemed trapped by embarrassment more than anything else, in need of perhaps nothing more that a little push to get themselves going again. Over 7 out of 10 hikikomori (71.2%) felt sorry for about what they were doing to their families. 50.8 % felt afraid of what others might think of them.

I may be overly optimistic, but it sound like that with a little counseling, perhaps some medication over the short term and a supportive local environment -- together with a temporary expansion of a worker training and job search programs -- the hikikomori social phenomenon can be reduced to a tiny number of truly mentally ill individuals.

Then again, believers in the hikikomori crisis would argue for a vast undercount, saying, "Why would on Earth would hikikomori answer the questions of government survey takers?"

_________________________

Sources: Jiji Press and Kyodo reports of the findings. Actual Cabinet Office report is not yet available online.

The abductee issue hits the wall

It seemed inevitable...and yet the day never came.

It seemed it would never come.

It was going to happen one day, over some incident or demand -- the day when the populace of Japan decided it heard enough of the sob stories of the families of the abductees -- the persons kidnapped by North Korean agents in the 1970s as a part of a seemingly ad hoc program of providing North Korean agents with unwilling instructors of Japanese language and customs. While five of these kidnapped persons eventually returned to Japan, the majority, according to the DPRK government, did not survive their captivity. The demands for the parents and siblings of these unreturned kidnappees have held successive Japanese governments hostage to pursue a hopeless and unrealistic total struggle against the government of the DPRK until the abductee problem is resolved to the families' satisfaction.

Long the darlings of the right wing in Japanese politics, for whom the vivid demonization of the DPRK was a convenient cover for a weakening of post-1945 Japanese pacifism, the families and the government seem to have crossed the Rubicon this week. They invited to Japan Kim Hyon Hui, the convicted DPRK assassin, who, posing as a Japanese traveler, planted a bomb on KAL jetliner in 1988, killing all 115 persons aboard the aircraft. To make matters worse, the families met with Kim at the country home of former prime minister Hatoyama Yukio in the exclusive and expensive resort town of Karuizawa.

Kim certainly had direct ties with one of the abductees, Taguchi Taeko, who was her teacher of Japanese in Pyongyang. Indeed it was Kim's confession that she had learned her Japanese from a woman abducted from Japan that punched the first hole in the Japanese government's assertions that the abductee problem did not exist, that the missing persons were not kidnapped, just missing. As a member of the special espionage branch Kim certainly knew of the other abducted Japanese. However, since she has been interviewed almost incessantly since her arrest, she certainly had nothing new to tell the families of those who did not return. There was certainly no reason to bring her to Japan, considering her terrorist past.

In bringing the pardoned Kim to Japan and entertaining her in such lavish style when she has nothing of substance of offer the government of Japan or the families of the abductees, except yet another opportunity for someone to repeat a maudlin retelling of the Yokota Megumi story, the government and the abductee families seem to have blown the collective fuses of economics-problems-focused public.

Need it be said that the opposition Liberal Democratic Party of Japan, which itself had once been in the thrall of the abductee issue, is having a field day criticizing the current government for its solicitude toward Kim?

In the records of public relations and media management failures, this visit looks like one for the textbooks -- on how even a completely controlled, can't miss event can dissolve into a media circus and a public embarrassment.

Which begs the questions --

1) Why can't the DPJ do PR?

and

2) Will this overstaged visit be the abductee families' last hurrah?

Electing a DPJ Leader

The Democratic Party of Japan is scheduled to hold a regular party leadership election in September. Prime Minister Kan Naoto is the prohibitive favorite to win this election despite the drubbing the party suffered in the recent House of Councillors contest. However, the rules for electing a party leader are rather Byzantine, leaving plenty of room for the running of an insurgent campaign, one that could give Kan and the rest of the current core party leadership serious angina.

The Rules for Electing a DPJ Leader:

The eligible electorate is divided into three sectors: a) registered party members and party supporters b) local officials who are DPJ members and c) Diet members.

To each sector is assigned a number of points, as follows:

a) Party members and party supporters - 300 points

Registered party members and party supporters mail in their votes to their local DPJ House of Representatives district headquarters. The candidate with the most mail-in votes from a House of Representatives district wins that district's one point. If a party headquarters fails to receive 100 total votes from supporters or party members, that district's point is forfeited.

The 300 potential points correspond to the 300 House of Representatives districts.

b) Local officials Municipal and prefectural assembly members - 100 points

Local officials Members of prefectural and municipal assemblies who are members of the DPJ all have the right to mail in postcards to DPJ headquarters with one candidate's name on it. After the votes for each candidate are tallied, these 100 local officials assembly members' points are apportioned to the candidates according to the D'Hondt system.

c) Members of the Diet - two points each

The DPJ members of the Diet from both Houses attend a joint party leader election assembly. At the assembly each member writes the name of just one of the candidates on a secret, written ballot. When the ballots are opened, each vote for a candidate is recorded as two points for that candidate.

There are currently 306 DPJ House of Representatives members and 106 DPJ House of Councillors members, meaning that a potential 824 points will be awarded through the direct election at the assembly.

The candidate with the most total points from this process wins.

That is what the rules say, until someone convinces me otherwise.
________________________________________

Source: DPJ website, "Daihyo senkyo kisoku"

http://www.dpj.or.jp/governance/policy/senkyo_policy.html

Yes, that the URL for the rules regarding the DPJ's leadership election is written out almost entirely in English strikes me as weird and embarrassing too.

Is There An August Surprise Regarding the Futenma-to-Henoko Deal?

On July 2, Sato Masaru, the extremely controversial former research analyst at the Ministry of Foreign Affairs, published a brief and rather annoyed opinion article in The Tokyo Shimbun. Sato, who is of Okinawan extraction, was complaining about the agreement that Foreign Minister Katsuya Okada and Defense Minister Kitazawa Yoshimi signed in Washington on May 28 reaffirming the promise to move the U.S. Marines elements currently based at MCAS Futenma to a so-called Futenma Replacement Facility (FRF) to be built offshore of Camp Schwab in Henoko, Okinawa.

What annoyed Sato was not the agreement. It was the translation.

Or lack of one, to be precise.

Sato begins his article with a recollection of his time in the Japanese Embassy in Moscow. Whenever bilateral agreements were being worked on, they were worked on in both Japanese and Russian simultaneously by the experts working for both sides. Every line, every word in each the text of an agreement in one language was checked aggressively against its counterpart in the other language, that nothing of possible detriment to Japan's interests sneak in due to a misused or ambiguous Russian term or construction. Both the Japanese and the Russian sides negotiated over every ambiguity, to nail down what every word of the bilateral agreement meant. In the end, the product would be two texts, one in each language, of equal validity, with Japan able to walk away with the confidence that in the case of any controversy, the Japanese side could point to the Japanese text as the definitive text.

To this, Sato contrasts the May 28 joint statement on the Japan Security Consultative Committee, where the government of Hatoyama Yukio acceded to the United States insistence that a Futenma replacement facility be built at Camp Schwab. Sato notes that contrary to the practices followed during his time in Moscow, the Japanese version of the text is not official. It is merely a "provisional translation" (kariyaku) of the English official text.

For Sato the lack of an equally valid official Japanese translation is a travesty -- a dereliction of duty by Japan's diplomatic corps.

The question is, when the Hatoyama Cabinet ratified via a Cabinet Decision (kakugi kettei) the May 28 agreement, what did it actually do? A basic principle of Japanese law holds that only texts written in Japanese have legal standing. If only a provisional translation of the Consultative Committee's was presented for ratification at the emergency Cabinet meeting held on May 28, after the forced resignation of Fukushima Mizuho, it does not follow that the agreement has legal standing inside Japan. In theory, in the absence of an official translation (seibun) the Cabinet ratified an unefforceable document.

At least, I think you can find a judge somewhere who would be willing consider the validity of this line of argument, and would be willing to issue a stay of any implementation of the May 28 agreement until an official translation has been produced and approved by the Cabinet.

Was the failure to submit an official translation to the Cabinet on May 28 really the result of sloppy work by diplomats? Or was this presumed spinelessness/laziness by design, an attempt to buy off the American side with a Potemkin ratification of what might indeed be a worthless piece of paper, taking the issue off the front pages until after the House of Councillors election?

To what extent can a Cabinet Decision can override a basic principle of law?

The Ski Jump and the Missing Five Million

Consider, if you will, the following graph:

This is the graph of the proportional party seat personal (kojin) vote totals for the New Komeito and its list of candidates in the last House of Councillors election. In the proportional vote, you can either vote purely for the party or for a single member on the party's list. Each vote for a single member counts as vote for the party, while the single member's vote total determines the ranking of that individual in the party's list when it comes time to divvy up the seats according to results spat out by the D'Hondt formula.

Having supporters of a party vote for individuals within the party rather than the party generates two potential dangers for the parties. Voters trying to write down personal names rather than party names are more likely to submit spoiled or invalid ballots. While every party has its celebrity "name only" candidates (like the Democratic Party of Japan's judoka mom Tani Ryoko) the parties tend to avoid encouraging their supporters from voting for the person, rather than the party.

Percent of total proportional vote given to the party, as opposed to a single member in the party:
The New Komeito's number really sticks out. It is even more of an outlier when one understands that the Sunrise Party's low number is the result of the second serious danger, a crafty operator like Katayama Toranosuke's use of his former support groups (koenkai) to vault up to the top of a party's list and to seize what is ostensibly a party seat essentially for himself.

So why does the New Komeito voter more likely to make the unusual decision to take the riskier course 52% of the time, writing down a personal name rather than a party name, and choose from a list of 17 persons in a manner that in the aggregate produces the extraordinarily shaped distribution we see above, which I call the New Komeito Ski Jump?

Two words: coordination and obedience.

Voters must receive instructions as to whom they are going to vote for--and the persons giving out those instructions have to be certain that those instructions will be carried out to the letter (or kanji or the kana, as is most likely the case here). Furthermore, in order to get that astonishing cutoff, the voters have to know who the anointed members of the party list are and who can/should/must be ignored.

Which brings up the real question: where did the New Komeito's 5.3 million district election votes go?

In 2010, the New Komeito fielded just 3 candidates in three electoral districts, one each in Saitama, Tokyo and Osaka. The total vote going to these three candidates was 2,265,818 votes. Looking at the lists below, some 5.3 million voters in 44 prefectures who plunked down for either the party or one of its anointed candidates in the proportional party vote had to vote for someone other than a party candidate in the district election.

As to a guess as to who that someone else might be, let us take a look first at the proportional party list results of the July 11 elections.

Proportional party list


Now compare the above to the district election results:

Electoral district


Call me unsophisticated and naive ("You are unsophisticated and naive" - Ed.) but when I look one line up in each column and see a 5.4 million vote rise in between the proportional party vote of the deeply unloved Liberal Democratic Party (LDP) and the vote for LDP candidates in the districts -- and I know that exactly the same pattern existed in the House of Representatives election of 2009 when the LDP and the New Komeito were coalition partners engaged in open vote switching, then please, please, please do not tell me that the 5.3 million unaccounted-for, highly disciplined New Komeito voters were free to vote willy-nilly on July 11 -- that they did not in the vast majority of instances submit their district votes to the LDP candidate in their district.

Please.

A Katz-Fink Dialogue on Japan's national debt and the management of national assets

It's late in the day, with the sun about to set...

The other day I asked two of the sharpest Japan optimists, Naomi Fink and Richard Katz, to give me five sentence-long answers to two simple questions on the actual size of Japan's national debt and the management of its national assets. They both grossly disregarded my instructions as to length, as you will see. I am the wiser, however, for their disobedience. With their permission, I here share their answers to my two questions.

Q1: Why is net debt rather than gross debt the more important number to keep in mind regarding Japan's financial position?

Q2: What are the main assets aside from Japan Post and shares in JT that the Government of Japan should sell in order to finance its budget deficit, staving off for a while the imposition of a rise in the consumption tax?

* * *

Richard Katz, Editor-in-Chief, The Oriental Economist

"The financial burden of the debt equals the net amount that the government as a whole owes to the private sector (and therefore the net amount of interest it has to pay the private sector). But about half of the gross debt in Japan consists of debts that one government agency owes to another, debts that in fact cancel each other out. For example, a substantial portion of the gross debt consists of bonds bought by the Bank of Japan rather than private investors. Another substantial portion of the debt consists of surpluses in the social security account. Suppose the social security system raises 100 billion yen more in year X than it spends. And suppose the rest of the government spends 100 billion yen more than it gathers in taxes. For the government as a whole, the deficit that year is zero. But in Japan, the social security system will "lend" that 100 billion yen to the MOF. The government's gross debt has thereby increased by 100 billion, even though the net debt--and hence its real financial burden--has not increased at all.

Selling assets does not solve the problem, except in a very short-term slipshod accounting sense. Let's assume that the assets are worth something, that they earn a return. Otherwise no private buyer would want to buy them. In that case, the government has gained some immediate cash, but it has lost the right to all the revenues that would accrue to it in the future from owning that asset. So, for the sake of quick buck, it has reduced its future non-tax revenue. There are some very good economic reasons to get the government out of the business of selling cancer sticks and running a huge bank and insurance company. But the notion that solves the problem that annual revenue falls short of annual spending is not one of them."

Naomi Fink, Japan Strategist, Global Marketing & Trading Division, Bank of Tokyo-Mitsubishi UFJ, Ltd.

"Regarding the first question, it is not more important to keep in mind net than gross debt when looking at the adverse impact of a massive government balance sheet upon growth - that the government carries much intra-governmental debt with little to show for it is not a recommendation for the efficiency of their asset allocation. However, if we are to discuss the probability of a fiscal crisis, canceling out intra-governmental assets and liabilities is relevant first and foremost - as Rick Katz pointed out, the MOF's ability to borrow from the social security system reduces the need for fund-raising from the private sector. But apart from net versus gross debt, it is also important to keep in mind when discussing the probability of financial crisis the country's external surplus/deficit position. Much less of Japan's current account surplus is being "recycled" abroad via direct and portfolio investments and instead is coming back to sit in banks as savings. Then, instead of lending banks are buying... what else but government debt? These "risk free" assets gain a higher capital weighting on banks' balance sheets, plus allow absorption of a greater amount of debt. This is why the G-20 exempted Japan from the necessity to reduce its fiscal deficits.

On the second point, I would disagree with Richard that selling assets makes no difference to deficits - in the late 80's when the government privatised NTT , there was not only the $70-80bn gained via the series of offers from privatisation itself (which is a sizable flow over the space of three years) then there was also a rise in both corporate and income taxes - because you can tax a privatised company's profits (assuming that privatisation makes it more efficient and thus profitable) plus the dividends on mostly retail investors' participations in the IPO. Longer-term, the idea is that these flows will jump-start asset reflation, which will be extended by the greater productivity of assets under private-sector than public-sector management. And judging by the experimental reverse privatisation of Yu-pack, such an argument might be made for Japan Post! Apart from Post and JT, one potential target would be the highways (perhaps follow the JR model and privatise plus regulate, to minimise profiteering as the government is wont to do). Then you have several hundred trillion in financial assets, comprised of foreign reserves, stocks (from the Banks Shareholding Purchase Programme), Zaito debt and FILP deposits. Of course, it would not make sense to dump all of this at once, but selective thinning out of the portfolio as assets reflate would make sense - these assets were accumulated under emergency circumstances, after all. I think that was the idea that Fortress had when they proposed setting up a fund that would buy non-performing assets from banks and - yes - governments projecting a 20% return. Yes, they might be wildly optimistic but let's face it, asset valuations are quite low in Japan and there is plenty of room to maximise the productivity of some of the currently government-owned or supported assets instead of using fiscal stimulus to keep zombie firms from going bankrupt.

Richard Katz -

The statutory tax rate on corporate earnings is 40%. The actual average tax:profits ratio for the corporate sector as a whole is closer to 26%. If the government owns NTT, it gets all of the profits. If it sells it and taxes the profits, over the long haul, it gets a fraction of the profits. Unless NTT more than doubles or triples its profitability simply by virtue of not being government-owned, there is net loss in the future revenue stream for the government. Keep in mind there is a big difference between government ownership and government management. Management is JR running too many mostly-empty trains due to government pressure. Government ownership of shares of a firm run like a private one is a very different kettle of fish.

No question but that the government should get totally out of certain businesses because that will raise efficiency and potential GDP growth. But the impact of that in Japan is rather marginal given the low share of government-run businesses. Without a genuine program to raise the efficiency of the private sector and deal with chronic shortfalls in domestic private demand, Japan will remain addicted to deficit. One-time only sales of assets won't solve the problem--no more than does a sale of a division by a private firm that still doesn't know how to make money. It only postpones the inevitable.

As for the claim that the government selling its shares in JT will instigate asset price inflation, I'm sorry, but I don't get it.

I believe Japan Postal Bank and Japan Post Insurance should be abolished, not privatized. Turning one of the world's biggest governmental monopoly banks and insurers into private monopolies doesn't promote efficiency.

As for the other financial assets mentioned (foreign reserves, stocks (from the Banks Shareholding Purchase Programme), Zaito debt and FILP deposits) how does transferring ownership of pure paper promote growth if the real assets behind this paper remains problematic? It seems to me that debt is debt, whether owed by the government or the private sector. We've seen lots of private debt crises, e.g. the US subprime. The issue is whether the assets backing that debt create the financial wherewithal to finance the debt service. If the government borrows money to improve infrastructure that, in turn, raises GDP and tax base, the debt is justified and does not become a financial problem. If it created debt to build bridges to nowhere, it does create a problem. If the private sector creates debt and debt-backed securities on buildings that are worth less than what it cost to build them, then it does create nonperforming loans. Just transferring debt backed by bad assets from government hands to private hands does not create financial solvency.

Naomi Fink -

Rick, I do agree that increase in efficiency is central to the success of privatisation - if it not possible at once to maximise profits and reduce costs by electing private-sector management, privatisation is, as you say, a mere transfer of assets. More transparent and better-quality management of the assets does matter and one clear purpose of privatisation should be to raise the marginal revenue of the privatised entity.

As such, when discussing the merits of offloading the business from the government's balance sheets as a going concern, one must consider both sides of the balance sheet - if the government achieves poor marginal utility from the assets with regard to their pareto efficiency, then the government's costs are also likely to be larger than those which would be imposed upon a more efficient manager of those assets. And I do not take as a foregone conclusion that private-sector management, even if subject to government regulations, will necessarily achieve a negligible change in efficiency of asset allocation.

You say, "No question but that the government should get totally out of certain businesses because that will raise efficiency and potential GDP growth." Indeed - and in the final paragraph, you question the ability of private sector Japan to manage entities, once privatised. Certainly, corporate governance is a very valid concern, shared by many overseas investors in Japanese stock. But low levels of current productivity is precisely why many wish to get in here - to achieve the superior returns that accompany increases in marginal revenue. This is where I believe that widening the investor base - particularly opening the doors to a variety of foreign investors - might help. The Fortress example is one such initiative (though time will tell whether successful). While the government is reluctant to "sell out" to foreign investors, there is probably value in exploring a model wherein foreign investors provide valuable information on the efficiency - and thus pricing - of private sector assets, long skewed by indiscriminate government handouts to for-profit firms.

As for your caveat that the impact of government getting totally out of certain businesses in Japan, that it is rather marginal given the low share of government-run businesses -- sure, but public financial intermediaries DO control 30% of domestic lending, which has the same effect - if we are to believe Modigliani and Miller, firm valuation is not determined by whether the firm is capitalised by debt or equity. The high rate of government intervention in lending could explain at once the high level of tolerance for poor corporate governance as well as the low level of competition among private sector lenders, who have been increasingly disenfranchised from provision of liquidity.

Regarding the link between IPO's and asset reflation - I refer back to NTT and the large proportion of retail investor participation in the offer. Retail investors, large holders of cash, dissave (thus reversing one of the key drivers of asset deflation) and divest deposits into equity assets. Thus, bank deposits do not build and are NOT funneled by banks into JGB holdings (Yucho was the leader of this trend), a trend that continues until investors turn risk averse once again about the ability of their future income flows (investment as well as employment income is important in a country with an aging population). So I take your point - the IPO is no universal salve to poor asset allocation and deflation but is one trigger which, if followed through by greater productivity in assets throughout Japan, could restore a "virtuous circle".

On your point about taxes -- "The statutory tax rate on corporate earnings is 40%. The actual average tax:profits ratio for the corporate sector as a whole is closer to 26%" -- I agree that the tax base is too narrow in Japan - according to the OECD, only one-third of corporates pay taxes at all. But this is a questioning of broadening the tax base, which might be done in tandem with a decrease to the headline corporate tax rate. If a greater number of firms pay taxes of 30% rather than 26% or zero (the remaining two-thirds) then presumably this should minimise the impact of cutting taxes on the handful of large corporates who actually pay 40%.

You say, "I believe Japan Postal Bank and Japan Post Insurance should be abolished, not privatized. Turning one of the world's biggest governmental monopoly banks and insurers into private monopolies doesn't promote efficiency." Perhaps - but the question is whether the government will realistically abolish both - and they probably will not. Thus minimising these entities' inefficiencies is probably a good compromise. There is an alternative to establishing private-sector monopolies and here "privatise and regulate" can work both ways - instead of "running half-empty trains," forcing JP Bank/JP Insurance to adhere to private-sector regulations on disclosure, record-keeping and capitalisation, plus pay private sector taxes could have a positive effect on private sector competitiveness. Using recent examples either actually implemented or proposed, exempting intra-Japan Post transactions from consumption tax puts private sector institutions at a cost disadvantage - as does the universal guarantee on bank deposits, as does the exemption from Basel II (let alone imminent Basel III) capitalization, as does the idea that know-your-counterparty rules should not apply uniformly to JP Bank as to private sector banking institutions. And the argument that imposing these guidelines will merely add to JP Bank's cost base makes the controversial assumption that the benefits of these private-sector guidelines are not valuable contributors to risk-weighted profitability - which if valid must be taken up with the BIS and anti-money laundering task force immediately! Add to this greater disclosure requirements to answer to private-sector shareholders.... greater transparency is central to identifying a firm's operating inefficiencies - such that if JP Bank/JP Insurance truly prove, under private sector standards unable to efficiently deploy their assets, the case for breaking up these large state-controlled "monopolies" emerges much more clearly than it would under limited-disclosure government ownership.

Richard Katz -

Lots of food for thought in what you say. And I completely agree that more foreign direct investment is vital to making the private sector more efficient as it has been in other countries. If I understand you correctly, then you and I are on the same page in saying that a sale of Japan Tobacco or Japan Post Bank simply to gain a quick cash injection does not solve the government debt problem over the long haul. The issue is whether, and by how much, privatization helps raise efficiency in these and other entities

Naomi Fink -

I think we do agree that the quality of asset allocation matters more than the transfer itself of assets from the public to private sector. For example, the idea of privatising half of Japan Post under the Kamei plan most likely would have been, as you say, little more than a transfer of assets veiling a privately-funded expansion of government-controlled monopoly, and it is probably quite helpful in this regard that the USTR and European Trade Commission decided to push for a "level playing field" in postal privatisation.

Richard Katz -

Michael, I think we are done and have given your readers something to think about.

Naomi Fink -

Thank you both very much for this - it has been a good, thought-provoking discussion.