Any Signs Of Abenomics' Working Yet? A Rant's Worth

As a huge fan of the writings of Princeton's Paul Krugman, I have been hoping that today's GDP release today would provide some evidence of Abenomics actually changing spending habits.

Maybe there is.

If mortgage rates are going to rise dramatically, one should see desperate buying in the interest-rate sensitive sectors. Lo and behold, looking at the nominal increase figures one finds a year-on-year quarterly rise of 9.4% (correct me if I am wrong, but when annualized, this is 44%) in private residential investment. Over that same span private consumption overall rose only 1.2%, or 4.9% annualized. (Link).

Some of this rush into housing, though, must result from the prospect of a sudden jump in costs taking place at the stroke of midnight on 31 March 2013. With the new fiscal year comes the rise of the consumption tax from 5% to 8% -- a huge price increase for consumers to swallow.

Either excuse -- rising interest rates or a big, bad new tax on transactions -- would be reason enough to get cracking on buying that piece of land, home or condo.

If consumers had fear of the new tax but only a weak fear of inflation, one should see weak or negative growth in big ticket items not bought on credit, i.e. - where borrowing rates do not enter into the equation. Consumers considering these big purchases would be right to oscillate between the temptation to buy now so as to to beat out the imposition of the tax and the fear of cheating oneself by failing to enjoy the new features of the latest generation of products becoming available in the new year -- items one still can buy before the March 31 tax tax rise kicks in.

Looking at the purchases of durable goods, we do find a -5.4% drop year-on-year (-23% when annualized) in the second quarter. This continues the shrinkage that began in the fourth quarter of 2013. The rate of decline is decelerating but the year-on-year figures for durables remain in the red, unlike the numbers for semi-durable and non-durable items. (Link).

Consumers should be worried about the price rises manufacturers are going to try to impose. Nevertheless, that fear has not manifested itself. Either that or consumers are not going on to go on a buying spree until the last few weeks of this year, when distributors and retailers slash prices to clear the way for new merchandise.

So in the aggregate consumers are spending more, but none of the extra spending may have anything to do with Abenomics creating inflationary expectations or expectations of robust (kencho na - borrowing the adjectival used this morning by Minister of Economics, Trade and Industry Amari Akira - Link - J) growth.

Where Abenomics has been successful is, of course, in the dumb stuff: government spending, exports and national income.

- Increase public spending, replicating the temporary burst the Democratic Party of Japan-led government deployed to prevent the triple disaster of 3/11 from engulfing the economy -- but this time without any disaster other than the continuing catastrophe at Fukushima Daiichi nuclear power station to counter, and yep, you can get nominal GDP back to where it was at its post-disaster stimulus height.

-　Have the Cabinet and the Bank of Japan swear to debase the yen expand the BOJ's balance sheet indefinitely. Calculate one's export earnings and the income from overseas investments in the newly debased currency's units. Look like a sales and investment genius, despite having done diddly (exports and income from abroad are up 4.7% and 16.6%, respectively, from the second quarter 2012 - Link)

Does the dumb stuff count? Sure...but the DPJ would be doing itself a great favor if one of its officers would just stand up and declaim:

"Borrow money and spend it? We could have done that. But we had a sense of responsibility toward the future, to not further deepen Japan's debt hole at the expense of future taxpayers. Actively attack the yen's value, telling folks to better get rid of their yen because we are going to fritter away the currency's relatively worth? We could have done that. Since we care about small businesses and consumers losing their domestic purchasing power, rather than the profits of the large exporters, we didn't. We didn't because we cared ...and even if we had not cared, nobody -- the media, the opposition parties of the time, the voters -- would have allowed us to behave so irresponsibly.

But the Liberal Democratic Party, coming in, manipulating the currency, increasing the deficit, stiffing consumers and savers? That, that is OK. In fact it is not just OK, you all are cheering it on!

The DPJ is in disarray, a loser because it does not know what it stands for? Ii kagen ni seyo!"

I know such a speech is not on anyone's daily schedule. Instead, likely as not those clining to the shell of a party will just keep carping about "wasteful public works spending" as if the voters know how do differentiate what is wasteful from what is necessary in a depressed economy.

However, that something will not happen does not keep me from smiling at the thought of what the reaction would be if it did.

As for my hopes that reality-based economists like Krugmam, Joseph Stiglitz, Brad DeLong and Noah Smith are right about the effects of ferocious quantitative easing and big fiscal stimulus packages -- they remain only that, hopes.

--

For the full press release on the preliminary estimates for Q2 2013 GDP: (Link - J)

Later -Thanks to all those who responded to the request for a correction.

Abenomics Showing Indications Of Destroying Japan's Economy

Japan's prime minister Abe Shinzo has shaken up the world economic circles with Abenomics, his bold mix of scatter shot fiscal boost, extremely loose (some would say slutty) monetary policy and a bundle of gift-wrapped regulatory changes benefiting supportive company presidents and reticent gestures in the direction of structural reform. Yesterday's government release on GDP in the first quarter of 2013 hints that Abenomics seems to be doing very quickly to the Japanese economy what the Friends of Abe have spent years trying to do to Japanese diplomacy: namely, run it into a ditch.

As the chart indicates, even a modest year like 2012 when Japanese businesses were under the thumb of a socialistic DPJ-led government -- frozen as it was to near immobility by divided control of the houses of the Diet -- the economy still grew at a robust annualized 5.3% rate in the Mar-Jan quarter. However, under the pressure of the Abe government's avowed attack on the value of the national currency, its adding to the national debt at an accelerated rate and the simultaneous destabilization of the bond markets and destruction of the purchasing power of Japan's burgeoning population of retirees, economic confidence has shrivelled. Real growth in Jan-Mar 2013 crashed to a mere 3.5%. In nominal terms, which are the meaningful figures in deflationary economies such as Japan’s, GDP shrank year-on-year at an annualized -4.0% pace...

--

The above is a parody.

However it is no more absurd than many of the prematurely laudatory, rose-colored glasses-wearing articles appearing yesterday in response to the government release of GDP estimates for the Jan-Mar quarter.


Later - Via Bloomberg: Goldman Sachs researchers have tried to find inflation expectations above and beyond those created by the mandated rise in the consumption tax from 5% to 8% next year.

The GS assessment of the net effect of Abenomics on expectations: none. (Link)

Later still - Right now it is impossible to disambiguate:

1) economic behavior driven by a sense of hope for a future of rising incomes, asset prices and employment

2) economic behavior driven by coldly calculated front loading of purchases to avoid paying the extra 3% tax

3） economic behavior driven by a panicked fear of rising interest rates and import prices,

and

4) economic behavior taking advantage of inventory clearance and special promotions in anticipation of companies trying to raise prices via the introduction of new products and services.

Under scenario 1, the economy keeps chugging through 2014 with a small, sharp dip after the tax rise. In scenario 2, economic growth is strong until the imposition of the tax, after which it falls off a cliff. Under scenarios 3 and 4, economic growth declines through this year, then falls of the cliff with the tax rise.

I know that the wealth effect of rising asset prices will provide a kick to certain sectors of the economy -- but the effects of wealth effect driven demand do not seem likely to have major impacts on domestic wages and employment.

Reality, What A Concept

Reuters takes a look at the Abe promises regarding fiscal stimulus through public works, a big par of the first arros of the "Three Arrows" of Abenomics. (Link)

The argument regarding the Yamba Dam is weak. Then again, an explanation of the Yamba Dam project and the difficulties folks have had in killing it requires an tour through the relationship between the central government and the prefectural governments.

It is also refreshing someone giving the Democratic Party of Japan -- at least the pre-Noda Yoshihiko premiership version of the DPJ -- some credit in trying to put a leash on Japan's love affair with concrete.

How And If Debt Will Change Anything

The Economist's Free Exchange blog has been looking at attempts to inject the behavior of financial intermediaries into macroeconomic modeling. A recent post introduces a paper by Markus K. Brunnermeier and Yuliy Sannikov (Link) which takes a hard look at the tale the post-Bubble Japanese economy has to tell about treating the financial sector as a afterthought or as a fundamental element.

I am trying to wrap my head around two items in the paper.

The first is the statement "Of course, aggregate total debt in a closed economy is zero." This is both obvious and salient for an economy such as Japan's where so much of all forms of debt are held domestically.

The second is this pair of graphs of the aggregate debt levels in the economies of the United States (left) and Japan (right).

What the right hand graph shows is that total debt in Japan is over 600% of GDP whereas in the United States the figure is less than 300%. The right hand graph also shows a massive shift in the creation of debt from the non-financial corporate sector (deepest blue) to the government (lightest blue) after 1991.

No surprises here either.

What I am trying to understand is where is the ceiling -- the point where the various actors inside a largely closed economy say to each other, "We cannot go on borrowing like this from each other anymore"?

Put another way, with Japan having zero incentive to foreclose upon itself, is there a percentage of GDP where the total aggregate liability becomes significant, save as a psychologically depressing factor?

Later - Reader MK points me to the long, graph-rich look at Japan's economy published by John Makin of the American Enterprise Institute (Link). While Makin tries, as most Americans writing on Japan's economy do, to influence ongoing fiscal and monetary policy battles in Washington, the paper gives a comprehensive, if pessimistic view of the likelihood of Abenomics changing Japan's overall economic situation.

One question: how is it that an economist who argues so strongly for the importance of large-scale, inevitably deficit-enlarging government spending, holds a chair at the American Enterprise Institute?


Image courtesy: Brunnermeier and Sannikov (2012)

Shinzo Does The Minimalist Thing

For a guy whose Cabinet and party are riding high in the polls (Link - J and Link - J) Prime Minister Abe Shinzo delivered a subdued and limited policy speech. (Link - J)

Unsurprisingly, he opened with an executive summary of the Algerian gas plant incident and his government's response to the crisis. Surprisingly, he did not connect the events of the last two weeks with a call for an expansion of the capacity of the Self Defense Forces to carry out evacuations of Japanese nationals.

Also surprising was how much of the the body of the exceedingly brief speech consisted of the pattings of the heads of the pet issues of a tiny minority, ignoring big policy issues of interest to the majority of the electorate. How else to explain the call to build a "respectable and proper society" (matto na shakai) -- the answer, it seems, to everything -- or the call for Japan to aim to be #1 -- a reference not, as some commentators are going to say, to Ezra Vogel, but to a question posed by Democratic Party of Japan legislator Ren Ho to bureaucrats defending Japan's next generation supercomputer program?

It was also striking how much of the speech was delivered in an intellectual crouch. Was it really necessary to kick up the hysteria quotient, declaring the economy, reconstruction of the Tohoku, foreign affairs and education in crisis? Yes, if you are trying to seize power in an election. Yes, if you are trying to foist unpopular programs on a doubting electorate. But when you are front-loading the budgetary and monetary goodies and enjoying 65% Cabinet approval ratings -- do you need to do it then too?

Sometimes one had to wonder whether the various parts in Abe's government are speaking to each other. Who is going to listen to Finance Minister Aso Taro's scoffing at the concept of the Japanese government having a beggar-thy-neighbor weak yen policy (Link) when the prime minister says in his Diet policy speech that unless Japanese policy changes, there will be no way to pull out of deflation and a high yen?

As to foreign policy, who made the calls? Mentioned were:

1) the deepening the Japan-U.S. security relationship, including the third rail of the relationship, the move of Marine Corps Air Station Futenma to a replacement facility

2) Japan-ASEAN relations

3) trendy threats: terrorism, cyberwarfare and natural disasters

What of China-Japan relations, other than a pledge to increase the national capacity to police Japan's territorial waters and airspace? What of Russo-Japanese relations? What of Japan-South Korea relations?

What of energy policy? Or energy, period? (Just one mention, PLEASE!) What of pensions, eldercare, youth underemployment?

And what are we supposed to make of a promise to return to primary budget balance in the medium term? Those who are interested in the issue know the promise to be a lie, while those are not interested in the issue cannot understand why the promise is being made.

And why as a conclusion, after making all sorts of promises to better Japan and make the lives of its citizens easier (including an eyebrow-raising pledge to make it easier for domestic companies and organizations to recruit non-Japanese employees) wind up the speech with an "Do not ask others what will be done -- the only way to improve your own lives is by your own hands?"

All in all, a surprisingly surprising little speech.


Later, much later - Here is a translated Yomiuri Shimbun article (Link) providing the background to Abe's rhetorical question, "Everyone, shall we not go forward from this day with a goal of being the best in the world?"

Signs of the Apocalypse #4

William Pesek and I in agreement regarding something, in this case Abenomics. (Link)

Pesek dives, as usual, way too deep in the smarmy snark and cynicism tanks. Nevertheless, he sees pretty much the same weaknesses I do.

I guess this means I need to take a hard look at my current levels of coffee intake.


Later - I should emphasize that I do not disagree with the fundamental policy -- that if one wishes to attempt a revival of economic growth, then one needs a combination of targeted fiscal stimulus, imprudent monetary policy and economic restructuring. I just cannot trust the Liberal Democratic Party and Abe Shinzo to make the tough decisions. Recall, the folks ostensibly running the country are the same crowd who, even when they possessed a supermajority in the House of Representatives, could not figure out how to renew a law 60 days prior to its expiration date.

[For those confused by the above, check out what happened to the Indian Ocean dispatch, the road construction and the gasoline levy laws in 2008. The LDP's mismanagement of the calendar staggers the mind.]

If Dr. Krugman, Matthew Yglesias and other Americans want the United States government to shrug off demands for fiscal probity, please do not point to the actions of an LDP-led government as a guide star. There is simply no way to idiot-proof a policy so that it is impervious to Abe and Company's ability to mess it up.

Many Thanks

Many thanks this morning to commenter "Troy." He has increased the value of my hastily-set down, half-formed opinions with links, supportive statements and counterarguments.

Though I value all of his comments--and hope my readers do likewise--I would like to highlight two of his most recent contributions.

The first is the link to the Ministry of Finance's English-language brief Japan's Fiscal Condition. While an update is due, the paper nevertheless provides an invaluable review, in just a few pages of graphs, of the background to the decisions being made regarding the country's finances. If you ever want, as I do, to rid yourself of the "It is my understanding that..." disease, going over this paper is a great first step.

The second contribution is a graph of the size of Japan's 25-45 years-of-age cohort (Link). While I for selfish reasons despair at the narrowness of the window described, Troy's graph does show the fundamental macroeconomic problem: the swiftly falling numbers of persons in the top consumption years. Reductions in Japan's productive capacity can be made up with increased participation of women in the workforce, delayed retirement and increased productivity. However, the loss of domestic consumption is an issue the government and business either fail to grasp or want to face.

One big victim of the shrinkage in the domestic market will have to be keiretsu tribalism. That Japan's markets are not free -- that purchases by either corporate consumers or individuals are guided as much by keiretsu loyalties as price or quality -- can be accepted and acceptable as long as the domestic market is growing or stable. The reality of a shrinking market -- that in order to keep sales on the same level, one must make inroads into a competitor's customer base -- is not something Japan's established businesses want to think about.

However, do not make any investments based upon the above. No matter how inevitable the collapse of a large institutional structure, it will survive longer than reason dictates or suggests.

Show And Tell

The Industrial Competitiveness Council (Sangyo Kyosoryoku Kaigi) is an ultra-high voltage group of folks. Its non-government members are:

Akimoto Sakie (Jodie), President, Saki Corporation

Hasegawa Yasuchika, President, Takeda Pharmaceutical Co. and Chairman, Japan Association of Corporate Executives (Keizai Doyukai)

Hashimoto Kazuhito, Professor, Tokyo University

Mikitani Hiroshi, President and Founder, Rakuten

Niinami Takeshi, President, Lawson

Sakakibara Toshiyuki, President, Toray Group

Sakane Masahiro, Chairman, Komatsu Group

Sato Yasuhiro, President, Mizuho Financial Group

Takenaka Heizo, Professor, Keio University

Credit where credit is due: one could not pick a more photogenic and knowledgeable set of representatives of Japan's management and business development worlds (applied chemist Hashimoto, one of the two academics on the council, is a poster boy of academic-industrial cooperation).

Which is the first problem.

All of these folks have day jobs running successful companies or academic enterprises. Hasegawa, Amaterasu bless him, has two day jobs.

Which means the amount of time and attention these persons can consecrate to the Industrial Competitiveness Council is minuscule.

Unfortunately, the amount of energy and effort needed to come up with a feasible action plan for improving the competitiveness of Japanese business would be immense. If this were a real, functional council on competitiveness, membership in the council would not just be one's day job, it would be one's life.

The Council had its first meeting yesterday. (Link - J)

Which is the second problem.

The Abe administration's economic revival plan is a trident with three prongs. The first is fiscal stimulus, either in a single burst or a steady program (Abe has unsurprisingly been silent about multi-year stimulus since the election). This debt-fueled kick start to the economy is geared to/needed to (there is a healthy debate as to the necessity) revive Japan's animal spirits.

The second is an ultra-accommodative monetary policy, driving down the value of the yen and savings and supporting mild (2%) inflation.

The third prong is supposed to be restructuring the economy. Since economic restructuring has an bad reputation, risutora being the euphemism for being laid off from work, the effort has been rebranded as economic revitalization, which sounds so much more hopeful.

Strangely, while the Abe government has needed no advice on how to structure a fiscal stimulus package (Liberal Democratic Party-led governments having done so well in this department in the past) or how to work with the Bank of Japan on monetary policy ("Push outgoing Bank Governor Shirakawa Masaaki into a corner? Nailed it!") it seems, on the subject of changing the way Japanese government and business do business, to be in need of wise counsel, delivered at a measured pace.

Could this need for advice, and not immediately, be because restructuring revitalization, requiring a strategy, meaning that one would have to pick winners and losers, meaning that one would have to dismantle or abandon inefficient market participants, which means demanding sacrifices from folks who tend to vote for the LDP, is...unpleasant?

Unpopular?

Hard?

To put it another way -- if you wanted to have a credible revival economic plan, would you not want to have the bitter and the sweet together so as to make the whole more palatable, rather do than what the Abe government is doing, which is tossing out the honey pell-mell whilst retaining the bitter pill for a council of wisemen and wisewomen to ponder over?

So let us say it together: the Industrial Competitiveness Council is a public relations stunt.

Takenaka will stick around until such time as the Abe government makes its choice for the next Bank of Japan Governor. He will then leave, either to take up the governorship or to spend his free moments more wisely (Takenaka should open a training school on how to shrug off unprofitable activities without a shred of remorse). Other members of the council will continue to attend meetings but only to tell shaggy dog tales.

Which is possibly the point of the whole exercise.

Politics and Poetry: Senryu For the Week Of January 19, 2013 - Money Troubles

The comic verses (senryu) printed in the Tokyo Shimbun of January 19, 2013 reflect the current focus on the Abenomics, the prime minister's mix of inflation targeting and fiscal stimulus intent on jolting the economy out of its current recession.

年替わり
「金」の話題
ばかりなり

Toshigawari
"Kane"　no wadai
bakari nari

As the year switches over
"Money" is the sole subject
of discussion

In December of each year, the monks of Kiyomizu Temple in Kyoto hold a special memorial event. A large blank piece of paper is propped up on an easel set on the temple's famous giant deck.　A monk, wielding an immense brush, writes upon the paper the Chinese character of the year.

Here is a photo from last December's ceremony.

The character for 2012 was kin - "gold" - a reference to the large number of medals won by Japanese athletes competing in the London Olympics.

Kin, however, can also be read as kane - "money." The author of the verse is noting that even with the change of the years -- the specific kawaru used denotes a change where one takes up something new after ridding oneself of the old -- the subject of conversation remains the same.

One of the questions regarding the inflation targeting aspects of Abenomics is what happens to consumption. The academic argument for inflation is that consumers, knowing that prices will rise, will make purchases now rather than later. There is certainly supporting evidence for this assertion in the way consumers reacted to the raising of the consumption tax level from 3% to 5% in 1997.

However, the 1997 example has its negative side. While consumers did splurge up until the date of the raising of the consumption tax, sales fell through the floor immediately afterward. Given Japan's demographics reliance on bank deposits to supplement pensions (not to mention high level of public debt held by domestic financial institutions as liquid capital) there is a reasonable fear that inflation will be a wash, as older workers and retirees respond not by exchanging depreciating money for real goods but by restricting their spending even more than current low levels.

In addition, the politically-motivated and directed fiscal stimulus package, funded through a sale of construction bonds, is seen as only adding to future tax burdens.

For one author, the end result is:

爺ちゃんの
財布を国が
狙っている

Jiichan no
saifu o kuni ga
neratte iru

The State is
taking aim
at Grandpa's wallet

Japan has been enjoying, if that is the word one wishes to use, a long span of cold, snowy weather. The extreme cold has led to a huge increase in the prices of fresh vegetables, particularly leafy greens. While some consumers have simple swallowed the rise in prices, most are responding by substitution (the other day on NHK, a vegetables specialist suggesting tiding oneself over through by increasing one's consumption of onions and kabu -- a distinctly medieval-sounding solution) or by going without.

Which left one author to look askance at the Abe government's inflation targeting scheme.

インフレ
レハーサルかな
野菜高

Infure
rihasaru ka na
yasadaka

A rehearsal
For inflation is it,
these costly vegetables?

As regards fiscal outlays, the Tokyo Shimbun has been following Liberal Democratic Party maverick Kono Taro's investigation into just one tiny slice of the budget pie: the Finance Ministry's request in the Special Account for the Recovery of the Tohoku for 2.5 billion yen to fund the acquisition of "A Large-Scale CT Scanner For Sendai Airport, Et Cetera." Kono has taken a look into what is inside that "Et Cetera" (等 - nado). Unsurprisingly, he found that more than half of the items listed under the aferementioned heading have nothing to do with with replacing Sendai's airport tsunami-damaged large CT scanner.

Of the 2.5 billion yen request,

- 1.2 billion is to purchase the CT scanner

- 800 million is to upgrade the National Tax Office's computer systems to handle the imposition of the special tax for the recovery of the Tohoku

- 320 million are to pay for the earthquake retrofitting of National Tax Office buildings in Osaka and Hyogo

- 120 million for "Other - unspecified"

The exposure of more than half of the items in a tiny corner of the Tohoku recovery account as being for non-Tohoku related expenditures, including some that the bureaucrats have not even bothered to specify, stimulated one author to acidly remark:

一文字で
予算を食べる
「等」怖し

Hitomoji de
yosan o taberu
"Nado" kowashi

A single character
That devours the budget
A frightening "Et cetera"

What I Am Reading And Why

- Dr. Adam Posen, one of the merry band of Neo-Keynesians who spent the latter half of the 1990s and the early 00's slapping around the degraded intellectual descendants of Milton Friedman, suggests that Dr. Paul Krugman's recent much linked-to praise of Abenomics (Link) is off base. While the Abe government's monetary program may be fathomable (Nota bene: Posen was a member of the Bank of England's Monetary Policy Committee from 2009 to 2012) the fiscal stimulus package is at best pointless. (Link)

Dr. Posen does not mention his more famous comrade-in-arms. Nevertheless he is offering Dr. Krugman a friendly hand that the Nobel laureate might pull himself up out of the swamp of Yglesianism (interim definition: "the act of writing about a largely imaginary Japan in an attempt to influence U.S. policy discussions").

Meanwhile, having dug himself into a hole in earlier praise for Abenomics, Matthew Yglesias just keeps on digging. (Link)

- Robert Manning of the Atlantic Council writes a brief background essay (ostensibly as a frame for the emergency visit of U.S. Assistant Secretary of State for East Asia and Pacific Affairs Kurt Cambpell to Seoul and Tokyo -- Link) highlighting one of the factors driving the Chinese government toward more militant behavior in the East and South China Seas: radical overestimation of exploitable hydrocarbon resources. (Link)

Manning's essay showcases the mismatch in between Chinese and non-Chinese estimates of recoverable petroleum in the seas under dispute. Difference in the estimates of recoverable of natural gas are even starker, with Chinese estimates running 125 to 250 times as high as U.S. Geological Service estimates. (Link - tip of the hat to reader JLK)

Anyone think that a fine little bureaucratic quid-pro-quo -- worked out between the Ministry of Land and Resources and the People's Liberation Army against, let us say, the Ministry of Foreign Affairs -- could be a cause of this extraordinary difference of opinion among geologists?

If Only I Were Alone

I do not want to be a naked East African Plains ape, waving his digits frantically, hooting in desperation that Abe Shinzo and his fellow travelers are a bunch of bad seeds kiting several hundred billion yen's worth of bad checks (Link) in order to buy July's House of Councillors election, at which point full-blown Abezania will be loosed upon this sadly scarred, dear little blue-green planet.

Seriously, who wants to be just like everybody else?

Top panel: [sound of an internal combustion engine - Abe Shinzo, in hard hat, driving an open cab vehicle, passing a construction worker operating a jackhammer]
Inscription inside a shining sun reads, "Making our way toward the revival of Japan."

Bottom panel: [wide view of Abe in road paving vehicle, flattening a path up a mountain topped with a flag reading, "House of Councillors election"]
"Or so they say..."

Sidebar: "Headed where?" (Doko ni mukete)

From the same printing of my local dead trees news service, a poem by a reader:

美しい
日本にお金
撒くと言う

Utsukushii
Nihon ni okane
Maku to iu

They say they'll sprinkle
money all over
beautiful Japan

"Toward a Beautiful Country" (Utsukushii kuni e) made not a jot of sense when Abe-san first foisted the idea upon us back in 2006-7 (Link) -- as what was on offer was not beautiful, save for those of an atavistic aesthetic.

From the looks of it, Abe's conceptualization of Beauty is still a source of sardonic amusement.

Of course, Beautiful Country Japan is not alone now. Abe 2.0 has found its disputable twin: "Japan's Beautiful Seas." (Link)

--------------------------

Image and senryu courtesy the Tokyo Shimbun, morning edition of 12 January 2013.

Blog On Economics With A Strong Japan Component

Okumura Jun has linked to Dr. Noah Smith's blog Noahpinion and it is a worthwhile read (Link). Dr. Smith is a rare Japan hand in the high stakes economics blogosphere, having lived in this blessed land for a number of years. Dr. Smith has some admirers in Japan, notably noted economics blogger Ikeda Nobuo, who has allowed Dr. Smith to post on his Agora site. (Link)

In his latest post on Japan's economy, "Should Japan Reflate?" Dr. Smith wonders whether it matters much if the monetary and fiscal policies of the Abe Cabinet trigger high levels of inflation or even hyperinflation. In his judgment, it would not. (Link)

I hesitate to agree with his conclusion.

While I have to agree with the self-evident statement that inflation destroys debt, which would be good for the economy, it would also destroy the value of bonds, which would be bad. Dr. Smith refers to such value destruction as a "tax" on elderly bondholders -- which it is in terms of outcomes. However, high or hyper-inflation would be dishonest taxation, one not vetted by an electoral test.

Inadvertently Dr. Smith's post highlights, rather than dismisses, the danger posed by the Abe government's enthusiasm for inflation. Dr. Smith claims that previous global incidences of hyperinflation have not been terribly damaging, at least from an economics standpoint (his use of Weimar Germany's hyperinflation as an example of a benign result tests my patience. As I remember, the collapse of faith in the Weimar government had a decidedly negative political outcome). As is often noted, almost all of Japan's debt is held by Japanese investors and institutions. What this means is that if inflation takes off, Japanese creditors get torched. This is completely different from the Latin American hyperinflations, where economic irresponsibility burned overseas bondholders as much as domestic ones (Argentina defaults and Italian pensioners are ruined, in the most recent example). High or hyper-inflation in this latter case is like lighting a stick of dynamite, throwing it, getting knocked down by the shockwave, then picking oneself up grinning, saying, "Whew, that was fun!" In the Japanese case, with Japanese on both sides of the creditor-debtor divide, inflation is like lighting a stick of dynamite, then holding on to it.

Not so fun.


Later - Dr. Smith replies in Comments.

He Always Has Something Interesting To Say

The Nihon Keizai Shimbun at one point chose Peter Tasker as the best equities analyst in Japan for five years running. That is not the best foreign analyst of equities. The best analyst of Japanese equities markets, period.

In an essay for the Financial Times, he proposes a very, very long-term solution to Japan's debt and stagnation crises.

Always a worthwhile read.

Why I (Don't) Love Conservative Think Tanks

The below are links to two papers on Japan's economic policies, one from the American Enterprise Institute and the other from the Heritage Foundation.

AEI - Is Japan set to boom?
by John H. Makin
(Link)

Heritage - Japan's National Budget: Time to Give Up on Keynesianism
by Derek Scissors and Kumi Yokoe
(Link)

Two papers, each offering a completely different set policy prescriptions for Japan to follow to grow again.

Both wrong.

For critiques of the AEI paper (no one has bothered touching the Heritage paper, yet) see the NBR Japan Forum posts by:

Arthur Alexander

Richard Katz

and

Mike Smitka

(Full disclosure: I have had communications with Mr. Alexander several times and two years ago had dinner with Mr. Katz and Dr. Smitka at an Asian fusion restaurant where the food was...indescribably bad.)

Why link to papers that offer bad advice? Because the intense focus of Japan's elites on the goings on in Washington can result in these damn things confusing the policy debate in Japan.


Later - Troy supplies a wonderful comment. Please click on the link.

The Politics of Reality

One of the enticing prospects of the auto-coup that saw scandal-dogged Prime Minister Hatoyama Yukio and Democratic Party of Japan Secretary-General Ozawa Ichiro replacing themselves with Naoto Kan and Edano Yukio was the possibility that DPJ policy could start reflecting Japan’s true position, rather than being a ragbag of collection of some seriously wonderful ideas alongside ludicrous aspirations and irresponsible promises made to every imaginable interest group.

The shine of the switchover to a more realistic politics wore off in what seemed an instant due to what turned out to have been a non-sequitur. The newly minted Prime Minister Kan, spooked as the whole world was to how close Greece came to default, tried to demonstrate the depth of his seriousness by suggesting Japan needed raise the consumption tax (in addition to several other fiscally contractionary measures) to return the country to the path toward fiscal balance, a path from which -- according to his former subordinates at the Ministry of Finance -- it had perilously strayed.

The public response to this proposal was swift and negative. Kan’s cabinet support ratings fell by a third. Support for the DPJ dropped also, though by a lesser proportion.

Part of the public response was a natural knee-jerk reaction against a tax rise. Greater possibly was a sense of betrayal, as a promise to not raise the consumption tax for at least four years had been a crucial part of the DPJ’s campaign literature.

However, a not insignificant amount of public opposition to Kan’s musings about raising the consumption tax came from the understanding that private consumption is highly sensitive to rises in this tax, and that an immediate rise in the consumption tax could lead to a catastrophic drop in consumer demand. Kan’s attempt to be responsible, to replace government borrowing with consumption tax revenues, was laudable, all other factors being equal. That all other factors are not equal, however, is something of which the Japanese public is painfully aware of after the country’s two decades of battles with slow growth and deflation.

The sudden deflation of confidence in the Kan government played a significant role the DPJ’s unexpected loss of ten seats and coalition control of the House of Councillors on July 11 -- though the huge losses suffered should more properly be attributed to the presence of the non-DPJ anti-LDP alternative Your Party candidates in a number of crucial districts and New Komeito vote trading with the Liberal Democratic Party in several others.

In response to the electoral loss, members of the DPJ most closely associated policy framework promoted by Hatoyama and Ozawa and tossed out by Kan and Edano, demanded the resignation of one of the policy makers closest to the Prime Minister --most vocally for Edano's resignation, as the secretary-general of the party perceived to be the person most directly responsible for the outcome of elections. Ozawa and Hatoyama loyalists also demanded a return to the policy line that existed prior to the takeover, a concerted effort to implement the entire 2009 DPJ Manifesto, compiled as it had been under Ozawa's tutelage.

Rather than take the usual route of sacrificing a close associate or his principles, Kan opted for a much harder route to redemption: abnegating himself.

Part of the choice of this approach was probably personal: on three occasions previously he has either stepped aside from a position of leadership or committed himself to acts of contrition and penance in response to what he saw as personal failures.

A larger part, however, is a simple admission of fact: the 2009 Manifesto was a document designed for winning a House of Representatives election in 2009, not for the running the country at any time. It is a core document of the DPJ’s, or more properly Ozawa Ichiro’s, road map to electoral victory. It cannot be cited as chapter and verse, as it was during the brief Hatoyama era, on how the country should be run.

In terms of policy, the 2009 Manifesto is the politics of unreality. There is not always a lot there there, and in some places there never was.

So during the final week of July and the first week of August Kan endured, in internal party meetings and in the Diet, complaints and abuse regarding his “mistake” of stating that Japan needs to get real. Rather than defiantly return fire, he was relentless humble, calling attention to his own mistakes and offering the hand of peace to opposition in the Diet, no matter how violently that hand was slapped in return.

The bravery (or foolishness) in choosing this path of self-abnegation becomes evident when one considers immanence of DPJ’s leadership contest, scheduled for September 14. Taking responsibility for everything that has gone wrong and not responding when challenged, either internally or externally, is hardly the route one chooses if one wishes to instill a sense of confidence in one’s leadership, and asks for a person’s vote.

Nevertheless, the path extreme self-abnegation seems to be beginning to pay off for Kan. He has kept his team together, despite pressure, minor though it may have been, from within the party to have a leadership shakeup. More stunningly, the public opinion polls are also showing the support numbers for his Cabinet stabilizing or indeed rising while the Do Not Support numbers weaken.

Polls from the end of the first week of August (figures from the previous poll in parentheses throughout).

Q: Do you support or not support the Cabinet?

Asahi Shimbun

Support the Cabinet 36% (36%)
Do not support the Cabinet 43% (46%)

Yomiuri Shimbun

Support the Cabinet 44% (38%)
Do not support the Cabinet 46% (52%)

Kyodo News

Support the Cabinet 39% (36%)
Do not support the Cabinet 45% (52%)

NHK

Support the Cabinet 41% (39%)
Do not support the Cabinet 43% (45%)

In addition to the improving numbers of the Cabinet, the DPJ as a whole has seen a tiny rebound in its fortunes, with the Asahi, Kyodo and Yomiuri polls all finding stabilizing or rising support for the DPJ with concurrent and consistent declines in support for the main alternatives, the LDP and the Your Party (Minna no To).

Q: Which party do you support?

Asahi Shimbun

DPJ 31% (27%)
LDP 19% (21%)
Your Party 7% (9%)

Yomiuri Shimbun

DPJ 29% (28%)
LDP 21% (24%)
Your Party 8% (12%)

Kyodo News

DPJ 32% (32%)
LDP 26% (28%)
Your Party 15% (16%)

Finally, even though non-party members do not have a vote in the DPJ’s leadership election, the public at large seesm to want Kan elected as leader of the DPJ in a formal party election, with him carrying on as prime minister. That there are voices calling on Kan to give up his leadership of the DPJ seems to be based not on issues of policy or personality but simply on the expectation that Kan, as the leader of a party that suffered an electoral defeat, should perform the traditional act of self-sacrifice and resign. What is interesting is how low the numbers are for this traditional act, considering the seriousness of setback the party suffered in the July elections.

Q: Would you like Prime Minister Kan continue as leader of the DPJ and as prime minister, or do you think he should not continue?

Asahi Shimbun

Should continue 56%
Should not continue 27%

Yomiuri Shimbun

Should continue 57%
Should not continue 30%

Q: In September the DPJ has a leadership election. Who would you want to be the leader of the DPJ?

Kyodo News

Kan Naoto 37%
Maehara Seiji 15%
Okada Katsuya 8%
Ozawa Ichiro 5%
Haraguchi Kazuhiro 5%
Edano Yukio
Others >1% each
Do Not Know 23%

The strength of these numbers is likely what is behind Kan’s boldest and riskiest gambit to date: formally repudiating significant parts of the DPJ’s 2009 electoral manifesto. The English-language report of the plan mistakenly identifies the source of the movement as the DPJ as a whole, when indeed it is a throw of the dice by the PM and those around him. The article thus misunderstands the disowning of parts of the 2009 Manifesto as “backtracking” when it is really the champions of a politics of reality dumping in the trash the parts of the Manifesto that could not be made to fit inside the nation’s budget or its present international political situation.

While reaching back in time to rewrite the 2009 Manifesto makes sense in terms of policy, it of course asks serious questions about the validity of promises the party will make going forward. Party members close Ozawa Ichiro, who led the compilation of the Manifesto, could possibly rebel and threaten to leave the party. Opposition parties will be merciless in their accusations of betrayal of the public trust, and endless in their insistence that no one can ever trust anything the DPJ promises ever again.

A loss of credibility as regards the 2009 Manifesto is a gamble that Kan, Edano, Chief Cabinet Secretary Sengoku Yoshito and others of their circle nevertheless seem willing to make. They are likely not sacrificing any sizable fraction of the electorate’s support. Even at the time of its promulgation, fewer than one voter in ten believed that DPJ would be able to convert all the 2009 Manifesto’s promises into concrete actions.

Disencumbering the party leadership and indeed the whole DPJ of the strictures of the 2009 Manifesto would leave the party open to three years (the terms of the House of Representatives and half the House of Councillors will both come to an end in mid-2013) of unfettered attempts to solve current and future problems of the country, rather than the passive fulfilment of promises to special interests. Certainly, transforming these policies proposals into law without a formal majority in the House of Councillors will be difficult. However, if public support numbers for the alternatives to the DPJ slide, as they have already begun to do, it is not outside the realm of the imagination to think that in a few months’s time a number of LDP and Your Party legislators will see wisdom in making common cause with the DPJ’s new realists on specific laws, or even to junking their affiliations with the parties of “No!” in favor of giving the DPJ either a working majority in the House of Councillors or a supermajority in the House of Representatives.

Of course, before any of the above can happen, Kan must survive the DPJ leadership election. A huge block of Diet members owe their seats to Ozawa Ichiro's electoral genius or were indeed personally recruited to join the party by him. They represent a huge hurdle over which Kan must leap if he is to remain party leader. Just how much realism Kan will have to jettison in order to win over enough party votes for him to come out on top on September 14 will be the question dominating Japanese politics over the next four weeks.

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."

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.

Indi, Just Let It Go!

Why I love Sato Masaaki, the cartoonist at the Tokyo Shinbun.


Prime Minister Naoto Kan, dressed as Professor Indiana Jones, hangs from his bullwhip, trying to keep from sinking into quicksand whilst clutching a small satchel marked "Consumption Tax." However, the branch his bullwhip is wrapped around, marked "Support Ratings," is cracking, presaging his being swallowed up in the mire. At the edge of the area of quicksand, the trio of Kamei Shizuka, Fukushima Mizuho and what seems to be Tanigaki Sadakazu mutter in confusion, "Just separate himself from it and he's fine, but..." (Hanaseba ii no ni...)*

The title of this work is "The Treasure" (Otakara).


Dedicated to EC, Richard Katz and Gerald Curtis.

Image Courtesy: The Tokyo Shimbun

------------------------------------------------------------------------------
* Just why Tanigaki would feel anything but unbridled joy at Kan's hanging on to a pledge to serious consider raising the consumption tax as a part of his fiscal reconfiguration package escapes me. Maybe the tall man in the glasses is supposed to be Ozawa Ichiro.

And the Home of the Brave

Just four weeks ago, we were looking, with not an insignificant amount of despair, at a 2010 House of Councillors election being fought over whether or not the PM is such a dufus that did not actually know how $14,000,000 of donations from his mom were handled in his accounts; whether Ozawa Ichiro is or is not Richard III; over whether the Democratic Party of Japan should be castigated for making promises it could not keep (because they were fiscally unsound) or for not keeping those promises; over how far backwards the DPJ was willing to bend -- to the small-scale farmers, to the trucking industry, to the postmasters and the postal unions -- in giving them what they wanted to the detriment of the national weal.

An ugly, dispiriting exercise, in other words.

Now, just a few weeks later, with Hatoyama Yukio, Kamei Shizuka and Ozawa Ichiro sent to the sidelines, the public is being hit with a hard, inconvenient truth -- the country takes in too little revenue to pay for the services the public has come to expect, meaning that taxes will have to be raised -- and that the voters will have to make their choices in the election booth based in large part on the soundness of their plans the various parties have put forther confronting that inconvenient truth.

On May 2, just a month and a half ago, the Tokyo Shimbun ran an explainer article, a little Socratic dialogue about the struggle inside the ruling coalition over when the subject of raising taxes will be broached: before the election, after the election or never.

Q: "So if the experts and the politicians both are thinking the same way, then it is in fact already decided that tax rates will be raised?"

A: "No, no, no. While you are likely to hear expressions like 'We will have to with haste grapple with fundamental reform of the tax system, including the raising of the consumption tax", nobody is brave enough to say what the new tax rate will be or when it will come into effect. Because whatever the government's plan is, it will be in effect a part of the DPJ's manifesto for the House of Councillors election."

Q: "And the DPJ has made a public promise to raise the consumption tax before, hasn't it?"

A: "Yes, in the DPJ's 2005 House of Representatives election manifesto the party put forth a plan to raise the consumption tax rate exclusively in order to stabilize the pension system. However, in that election, the DPJ suffered a landslide loss."

Nobody is brave enough...while it is true that Prime Minister Kan Naoto, DPJ Secretary-General Edano Yukio and Chief Cabinet Secretary Sengoku Yoshito are calling the bluff of the Liberal Democratic Party, which had challenged the ruling coalition to show some guts and talk about raising the consumption tax to 10% - a number the LDP never dared mention when it was in power save as a hypothetical -- it is not hyperbole to say that they have proven the Tokyo Shimbun wrong. The DPJ's new core leadership knows that talk of raising taxes is political poison. The party has taken a body blow (as did the LDP before it under Takeshita Noboru and Hashimoto Ryutaro) for talking honestly about Japan's fiscal situation and the unpleasant business of rebalancing the whole.

Let the tough talk continue. Hurrah.

(This post has been reedited for clarity, based upon a reader's comment. - MTC)

What Does the Election of Naoto Kan As DPJ Leader Mean?

- Where You Stand Depends On Where You Sit

For only the second time in 50 years, the incoming prime minister will be a representative of a primarily urban or suburban district. The other such prime minister of the last 50 years? The fabulously successful Koizumi Jun'ichiro.

Having a PM coming from a district where the voters are almost all white collar salaried workers or members of the managerial classes will likely have a significant effect on economic policy. Urban and suburban voters tend to see government as a regulator and a guarantor of fairness rather than as a source of largess. Indeed, many urban and suburban tend to see the state through corporate lenses: when there is a shortfall in revenues or an economic slowdown, the correct policy response is cutbacks and restructuring, making darn sure that the only projects getting funded are the ones likely to have an economic return.

As Finance Minister, Kan has already demonstrated an easy acceptance of the MOF view that Japan's most severe economic problem is its burgeoning public debt, with budget cutting and increases in the consumption tax as the policy tools of choice. That such policies are likely to constrict economic growth is relegated to the realm of unfortunate details.

Kan's representing a bedroom community of Tokyo also improves his chances of remaining popular over the long-term (should he prevail in September's DPJ leadership election, that is). Kan speaks the language and thinks the thoughts of the 80% of Japan's population crowded in and around urban centers. Just by reflecting the views of the people who have been electing him since 1980, including in 2005 when LDP landslide left him the DPJ's only surviving district representative in the Tokyo Metropolitan District, will have him in sync with over three quarters of Japan's population -- something his immediate predecessors as DPJ party president could only be vicariously and insincerely.

- I Got Plenty of Nothin'

It should not be surprising that Hatoyama and Ozawa had problems with managing their campaign finances: they both had so much money to manage. In contrast to the vast sums his predecessors had to keep moving around, Kan's personal wealth or the amounts of money he controls are both minor. That he has a clean reputation may be simply a matter of a dearth of funds rather than a surfeit of personal virtue.

That Kan is seen as clean is hugely important to the reestablishment of the DPJ's image as a party that was simply better than the Liberal Democratic Party. Having the financial irregularities-plagued Hatoyama and Ozawa remaining ensconced in the two top party leadership positions these past few months has infuriated the voters, who gave the DPJ its chance last year not based on the likelihood that the party would deliver on all its campaign promises (in fact over 90% of the population doubted the DPJ would) but because the populace had simply had it with the scandal-riddled, vote-scrounging spectacle that was post-1993 LDP.

- Goodby Tanaka-san, This Time For Good

Ozawa Ichiro has played the electoral map as it exists as well as anyone ever has. He has made the deals and promoted the policies that made the DPJ into winners.

Unfortunately, the map and rulebook Ozawa has been working with had been drafted with the purpose of keeping the LDP in power. Not surprisingly, the DPJ that was prevailing in the LDP's place increasingly resembled the LDP.

The days of the current electoral map and rulebook have been numbered, however. The sudden collapse last month of the intellectual edifice prohibiting most Internet campaigning, the string of victories in the district courts of lawsuits asking for invalidation of the 2009 House of Representatives election due to the large number of districts with inexplicable deviations from the principle of one-citizen-one-vote; and full-scale assault over the last year upon the public corporations and non-profit entities whose vast armies of scarcely working employees and their retired bureaucrat managers has long been dependable voting banks for the LDP -- all are indicators of the end of the era of the LDP Dependency State. Further out, in response to the coming decennial census, a root-and-branch redistricting of the House of Representatives - the most profound transformation of Japan's political landscape since the replacement of multi-seat constituencies with single-seat districts in the mid-1990s -- is set to take place over the next few years.

Kan's intent to undo the changes Ozawa has made to the DPJ -- exemplified by his confident "for the good of the Japanese politics, the DPJ and himself, Ozawa Ichiro should be quiet for a while" comment and his promise today to reestablish the DPJ's Policy Research Council -- is not mere political theater undertaken with the intent of influencing the voters in advance of the House of Councillors election. Kan knows he must quickly demolish the structures and practices Ozawa seemed to be crafting in order to delay the full flowering of the grand transformation already underway, lest that flowering again be delayed because of a political master's fiddling.