The Annual Economic Report of RIALS, FY 1998-99;
Reviving the Japanese Economy beyond the Present Crisis
The Japanese economy has been in a deep recession and not a few ordinary citizens are on the edge of losing their jobs. This year's report starts a prelude chapter-where we outline analyses and proposals extended in the following three parts-with Schumpeter's words in the Theory of Economic Development, meaning that a recession can hurt workers who do nothing related to causing an economic fluctuation. In the first part, we survey the current economic situations and propose a policy package urgently needed to reverse a vicious circle of recession. In the latter two parts, we analyze the Japanese economy from medium- and long-term perspectives. Part II focuses on reforming the super-structure of economy-fiscal and financial systems-in order to achieve a sound macro-economy. Part III assesses the developments of private industries-especially manufacturing industries-and the roles of labor unions in the era of global economy.
1. Assessment of the current economic situation
The weak recovery of the Japanese economy halted in spring of 1997 and the situation has become severe and severer with a deepening recession and without sign of bottoming out. The biggest cause of this recession is that the government misjudged the condition of her economy-sluggish recovery owing to the collapse of asset prices' bubble-and tightened her fiscal stance drastically from FY 1997. Moreover, the government actions to the serious setback of business were too late, because she adhered too much to the fiscal structure reform. Proceeding into FY 1998, the Japanese economy has been entering a phase where the decline of households' incomes thwarts any growth of consumption expenditures and the economy is captured by the vicious circle of recession. As a result, the worsening non-performing loan problem deteriorated the confidence to the banking sector of Japan, and ordinary workers are on the edge of losing their jobs. Unless reversing this vicious circle as soon as possible, the output gap would widen further to lead to a great depression where the general price would go down in a large extent along with debt deflation.
In addition, turmoil in the global financial markets starting from Asian currency crises has not calmed down, and there emerges a concern about simultaneous recessions in the world. The greatest contribution of Japan, the second largest economy in the world, to help stabilize the world economy is to cultivate a prospect of reviving the Japanese economy itself and to break the chain of globaleconomic contraction.
Current economic distress of Japan is not merely reduced to an adjustment process in the ordinary business cycle, but also to the failure of economic policies over the past decade. Inflexible fiscal policy under the doctrine placing the utmost priority on reducing the budget deficits has harmed the stability of macro-economy to have virtually failed to reconstruct healthy government finance itself.
Postponing to resolve the non-performing loan problem in the aftermath of collapsed bubble economy has incurred the prolonged economic sluggishness and the current financial turmoil of the Japanese banking sector. It is essential to introduce innovative policies to cultivate a prospect for economic revival.
2. Short-term economic policy measures
2-1. Fiscal stimulus is necessary
Stimulating demands through fiscal expansion is necessary to resume an economic recovery. As for the contents and magnitude of these measures, we should assess it first how instantly they will add effective demands, and then how effective to increase economic dynamism and make recovery sustainable.
To begin with, it is necessary to relieve the households' distress through income tax cut and stimulate consumption expenditures, which are the key to economic recovery. As consumption expenditures induce demands of various kinds of industrial sectors rather than public investments do, they are apt to lead sustainable growth by benefiting those industries that better reflect the market's needs. On such occasions, it is important to benefit middle-class workers, whose propensity to consume is higher than other classes' one owing to necessity to spend much for child cares etc. In this sense, expanding such social benefits as the child allowance program could have the same effect as income tax cut. Improved child allowance program would be also expected to help reverse the on-going tendency of fewer children per family.
Second, in the light of instant effectiveness, promoting public works is essential. Input-output analysis shows that they induce, as a matter of course, a greater production of the construction sector, but the sum of their production inducement effect for other industries exceeds one unit. They must be concentrated on such programs as to develop information infrastructure, social capital for urbanized areas, and currently insufficient welfare and care facilities so as to contribute to activating economic dynamism for medium- and long-term. The government may invest public money in advance into such projects that will be surely necessitated in the future, and then the government could privatize them.
Regarding the magnitude of these fiscal measures to boost economy, the government is saying "permanent tax reductions in total substantially exceeding 6 trillion yen" and "the budget for 15 months". Although it sounds like a substantial magnitude, it should be noted the fiscal stance of FY 1999 that this government saying have shown would be not more expansionary than that of FY 1998, when 16 trillion yen fiscal package was added including 4 trillion yen of temporary tax cut. Taking into account the fact that resolving non-performing loan works as a depressing factor on the economy at least for a while, and that global economic situations are getting uncertain, it is doubtful if this magnitude of stimulant measures is large enough to recover the economy. We propose at least 10 trillion yen of income tax cut, including additional social benefits, targeted on the middle-class workers is required, while the amount of public works, on the initial budget basis for FY 1999, should be over that for FY 1998 including the supplementary budget. Moreover, stimulus measures will have to be added if necessary in response to economic conditions.
2-2. Measures to relieve households' distress, centered on the middle-class salaried workers
The major cause for the stagnant consumption expenditures is the lowering propensity to consume due to the decline in disposable incomes and the decline of consumers' confidence. Looking to trend of propensity to consume by age bracket, propensity to consume in the age bracket of 40s is relatively higher, and against general decline of propensity to consume through the 1990s, propensity to consume in this age bracket has been remaining almost intact. This may be attributed to the fact that householders in this age bracket run the households which have to expend much more money on education expenses of their children, and that many of them must repay housing loans, so that their ability of consuming more is rather limited. Therefore, in providing tax break, it is essential to conduct tax reductions primarily addressing the abatement of financial burdens borne by the middle-class salaried workers, and also tax break is very effective to encourage recovery in consumption expenditures for short-term.
Since the special tax reduction program for fiscal 1998 is implemented on a fixed amount basis, the alleviation of tax burdens borne by the middle-class salaried workers by means of modifications in the existing tax rates requires of revisions in the tax rate structure which would lower the level of tax burden by some 20% for the households earning annual incomes of \8 million, and by some 50% for the households earning annual incomes of \6 million.
Furthermore, in addition to revisions in the tax rate structure, other specific measures targeting reductions in their financial burdens, including expansion of child allowance and tax reductions on acquisition of housing, are required. Compared to child allowance programs in European countries, our child allowance program only covers infants of less than 3 years old, and restrictions on incomes for eligible households are much more stringent than European counterpart. As the problem of fewer children per family becomes as a matter of increasing concern, too, the child allowance program should be enlarged fundamentally through substantially expanding coverage of the program in terms of age and income limits on household eligible for the program. If monthly child allowance of \10,000 (\20,000 for the third and over) is disbursed to children up to 15-years-old, the necessary budget amounts to more than \2 trillion.
Moreover, tax reductions on acquisition of housing are required because those households which had to acquire their houses at higher prices in the midst of economic bubbles must be relieved from dead weight of repayment of housing loans against slow growth of household incomes. Also, from the viewpoint of stimulating potential demand for housing, it seems necessary to draw scrapping and selling out plans for obsolete official residences and company-provided housings. Selling out of sate-owned and company-owned real estates contributes with their proceeds to reconstruction of national finance and improvements in financial positions of these companies, serves to re-develop urbanized areas because many of these real estates feature relatively large lots located in readily accessible areas, and thus may lead to revitalization of property market, and in this sense it is a three-birds one-stone solution.
2-3. Providing a sense of assurance for the working public through fundamental reinforcement of employment policies
It is very much important to try to strengthen measures of securing employment in every aspect, which include preventive measures against unemployment designed to thwart further worsening of employment situations, measures to create jobs, and measures to insure livelihood of the unemployed and help them to re-enter the job market. The mounting concern about a threat of unemployment in current recession that has been never experienced has to be soothed as immediately as possible. Employment or job security is the very base for stabilization of national life and one of the essential prerequisites for consumption-led economic recovery. In the tough environment for those who want to re-enter jobs, the utmost priority task is to insure livelihood of the unemployed during a transition period until the situation is improved. Basic benefits from the employment insurance policy must be to guarantee adequate benefit levels for a sufficient period of time through making use of extended benefits for individual cases, and at the same time policy review in favor of easing requirements for qualified beneficiaries seems necessary. In this regard, the government's employment insurance account suffering the worsening revenue/expenditure balance due to the increase in payment of benefits in recent years must strengthen its sources of funds for benefit disbursement by resuming, for example, the 20% rate of national treasury charge in order to manage risks of potential increase in jobless workers due to corporate bankruptcies, and thus to provide a sense of assurance in livelihood for the working public on the occasion of unemployment. One option to secure sources of funds for unemployment benefits would be to float government compensation bonds for necessary disbursement as is the case of the financial rebirth account.
2-4. Public investment: break away from measures based on the supplementary budget approach that is not accompanied with actual expenditures
The conventional approach that adds substantial amount of money in the supplementary budget to the public investment programs authorized in the original budget has caused difficulties in executing public investment programs themselves. Because the government-publicized overall magnitude of programs to boost business contains expenditures other than the "net additional expenditures", its business-stimulating effect is not only smaller than that claimed as overall effect of the supplementary budget, but also the "net additional expenditures" themselves are not executed to any substantial extent. Compared to the government forecast public investment in the Government Economic Forecasts, levels of the actually executed public investment have been lower than levels of public investment in the initial government forecasts since fiscal 1994, even though the government says it has been carrying large-scale packages of business-stimulant measures. Looking to settled accounts for public investment programs, the settled amount of public investment has been substantially lower than their authorized amount since fiscal 1993, and every year some \2 trillion has been carried forward to the next fiscal year. In this background, there underlies the problem that local governments which are the principal authority to run public investment programs in most cases are not able to manage these programs even though the central government appropriates subsidies to these programs in the supplementary budget. Looking to these problems, it is necessary to work out a full-swing budget for stimulating business at the stage of chalking up the initial budget.
2-5. Efforts addressing rebirth of financial systems
Another major reason for the fact that the business stimulant measures to date have not resulted in a sustained recovery is that financial systems remain in malfunction as the final solution on the bad debt problem is still suspended. There would be other challenges overlooked in financial systems, but at any rate it is essential to write off bad debts as immediately as possible by making use of the framework of the financial rebirth law and other related laws.
To begin with, the early remedial measures should be applied strictly and fairly to isolate those financial institutions either run into excessive liabilities or stood at very low ratio of net worth from the market (by closure or transfer to public custody), and to have those financial institutions failed to comply with the BIS requirement for net worth ratio retreat from international operations as soon as possible. For those financial institutions whose net worth ratio temporarily failed to meet the domestic standard at least at present due to stock prices and other macro-economic situations, but are very likely to resume sound financial positions when macro-economic situations improve, it is necessary for their supervisory authorities to conduct monthly inspections to check these financial institutions' progress in restructuring efforts, and to actively conduct capital infusion by subscribing their preference stocks with public funds in order to prevent any credit crunch. Also, for the Class 2 debts (the gray debt) which are very difficult to be classified, though, the following measures are seemed effective to enhance incentives for financial institutions to classify these debts fairly and make their financial positions healthier: to make it mandatory for them to increase reserves for uncollectable accounts in response to the development of accrued bad debts; to let them disclose the result of evaluation on bad debts; and legally pursue their responsibilities when intentional fraud is found in their bad debt classification, including a charge against breach of trust.
Then, it is particularly important for the government to assume accountability. The lack of the government's accountability or its ability to clearly explain and persuade the Diet and the public of the necessity for financial rebirth and related laws, as exemplified by explanation by government officials on the issue of the Long-Term Credit Bank and these laws, merely saying: "It's disastrous. It's common sense in the world financial society", was the largest cause for taking much time in the Diet to clear these laws. On any occasion of infusing public funds into the rescue of financial institutions, it is required for the government to explain in a readily understandable way to the public that taxpayers' burden related to the infusion of public money is to be minimized. Also, much use of screening or review committees likened in their role to advisory commissions to the government makes it obscure who is responsible for any rescue decision. In this particular area, hiring of experts outside the government who specialize in financial affairs, and regulatory practices based on objective criteria rather than the discretion of competent authorities are inevitable, while any ruling of bankruptcy or infusion of public funds without political responsibility may be rather difficult to perform. In this context, it is necessary to have a clear principle of organization that have the minister in charge of financial administration, or for much important matters the prime minister assume the final responsibility for such decisions. And, also, it is essential to perfectly separate financial administration from monetary administration, and centralize administrative functions on financial matters.
On the side of financial institutions, disclosure of information is badly required. Without disclosure, market may judge that the reluctance to present proper information reflects the worsening financial position of the finncial institution refusing to make public its management information. It is solicited for financial institutions to actively commit to disclosure and regain confidence of market and the public in them.
Finally, a full-swing writing off of bad debts, when highly esteemed by market, may reverse the bearish stock prices, while in short term it may work as a depressing factor to business. Minding the fact that worsened business swells the amount of bad debts and makes it much more difficult to settle the prevailing problems, it is required to add fiscal measures propping up business in a timely manner.
2-6. Necessity for the pension issue to be discussed to a full extent by every social group of the nation
Regarding the pension issue which is one of the causes intensifying Japanese people's concern about their well-being in the future,there are many hot issues such as equitableness in benefits and financial burden among generations, relations between ratio of premium payment to total incomes and economic vitality, appropriateness of the assumptions for the Ministry of Health and Welfare's forecast on pension (for example, if it is necessary for pension funds to have reserves for three years of benefit payment even at the time when the pension system is matured), and how to count in risks of sudden changes in economic conditions when a full premium payment system is introduced, to mention a few. In reforming the pension system, it is essential for Japanese people to be convinced that their opinions are reflected in reforms. Without fettered by the existing schedule for reforms, it is necessary that problems of the pension reform are thoroughly discussed among all social strata of Japanese people under complete disclosure of information.
2-7. Our point of view for wage increase in the spring labor offensive
In addressing the spring labor offensive for the next year, it is necessary for us to have a viewpoint that a steady increase in incomes earned by households leads to sustained recovery of consumption expenditures. Reductions in employment cost may look as if benefiting individual companies, but for economy as a whole, consumption expenditures are retrenched to bring about negative results for these individual companies. It is necessary to pay attention to this "false of synthesis" effect. Accordingly, it is required for unions not only to seek retention of employment but to ask reasonable wage hikes taking into account improvements in labor productivity for medium-term.
3. Reform of systems to revive the economy
It is essential to have a viewpoint to revive the economy based on the market principles and democracy, and for social solidarity
3-1. Reconstruction of national finance through thorough review of revenue and expenditure structure
An urgent expansionist fiscal policy serves to increase budget deficit in short-term, but a continuation of sluggish economy thwarts any growth of tax revenues, so that virtually reconstruction of national finance is not realized. In order to materialize reconstruction of national finance, it is important first to secure stable growth of national economy, then to have a viewpoint of renovating national finance to help enhance economic vitality, and to manage rebuilt of national finance under the balanced growth of economy in medium- and longer-term. Rather than trying to make these and other figures consistent, it is essential to start discussions about how the prospect for balance of national finance would be for medium- and longer-terms when radical reforms on structure of national finance are launched. To this end, it is important to make national budget readily understandable for the people, that is, to explain what effects does national budget bring about on the entire economy and stability of and improvements in national life. And, reforms in this respect should be carried out immediately.
(Expenditure side)
- In order to improve effectiveness of expenditures,
renovation in administrative management practices is required through the establishment
of an "assessment and evaluation system with the introduction of a
"control by goals/achievements".
- The existing business-stimulant measures centered on
additional infusion of public investment by means of supplementary budget shall
be replaced with a new "business adjustment and new social capital
account".
- Introduction of a "PFI in Japanese version" and
other methods to make use of funds and management capabilities available from
the private sector.
(Revenue side)
- Together with permanent reductions in income tax and
inhabitant tax, particularly in favor of the middle class salaried workers, a "taxpayer
coding system" accompanied with a "basic law for protecting personal
information" (tentative title) shall be introduced and taxation upon total
incomes shall be reinforced in order to eliminate inequitable taxation.
- For consumption tax, the invoice approach shall be
introduced to mitigate the regressive nature of consumption tax, and at the
same time an approach to replace payment of social insurance premium now
financing the basic pension with consumption tax revenues shall be considered.
- For taxation on business corporations, the current
corporate income tax rates shall be lowered to the international levels, in exchange
for abolishment of the existing special taxation measures which have turned
into vested rights for these corporations.
- The existing taxation system on land shall be revised to
allow effective use of land.
- Distribution of financial resources between the central
government and local governments shall be revised to provide adequate funds to
the latter.
3-2. How the government's finance administration should be in the era of Big Bang in capital markets
In order to revitalize the Japanese economy, it is essential for market functions to be allowed to exert their efficiency-seeking dynamism to a full extent. To this end, improvements in efficiencies in the financial sector, the heart of economic activities, are especially important. In contrast with the manufacturing industry which has been exposed to fierce international competition and has positively adapted to globalization, the financial service industry, which has been protected by the "convoy system", has been not only unable to fix the bad debt problem by themselves, but has failed to ride on sophistication of currency and fund management techniques prevailing in the world, and thus has failed to efficiently manage wealth of Japanese people. The government's financial administration and the financial service industry as well are required to promote the Big Bang in the financial sector designed to improve efficiencies in this sector, and for the purpose of securing order in financial services, they are urgently required to let market disciplines work by thorough disclosure of information,and firmly establish financial administration based on rules rather than discretion of regulatory authorities.
Financial institutions in the private sector are required to provide willingly detailed management information, specifically the internationally acceptable information by adopting accounting practices based on current cost to resume confidence of market. For regulatory and supervising actions to secure order in credit functions, a substantial increase of inspectors specialized in financial services is necessary to carry effective inspection in the increasingly sophisticated and complicated financial market. In this regard, even after inauguration of the Finance Supervision Agency, those inspectors scrutinizing local financial institutions are still anomalously loaned from regional finance bureaux of the Ministry of Finance, but they must be transferred to the Finance Supervision Agency as soon as possible and be incorporated into the Agency's organization to assure them of bringing their expertise to a full extent.
3-3. Resumption of politics' governability
In order to materialize stability in macro-economy, and at the same time to link fruits obtained in marketplace with improvements in well-being of Japanese people, politics must regain their governability specifically in economic policies. For the administration which presents salient fatigues of existing systems such as ill effects of uncoordinated administrative practices on the same or similar issue, reforms centered on the strengthening functions of the Cabinet are required, and at the same time legislature is necessitated to enhance its function of policy-making.
For the purpose of reinforcing legislature's policy-making function, it must have well-assorted think tank functions. In the case of the U.S. federal congress, it retains excellent think tank functions such as the Congressional Budget Office and the General Accounting Office. One idea to this end would be to trim executive offices in the administration through regulatory reform and transfer staff made redundant by regulatory reform to the enrichment of think tank functions in the Diet.
Also, it seems important for the Diet to let the administrative offices practice "thorough accountability to Japanese people" and "improvements in policy evaluation function" as the Diet is the central forum to present will of the people. The Diet is in the best position in channeling reflections on deficiencies and failures of foregone policies into specific policy-making processes. For example, a lot of white papers produced by the government could be re-positioned as materials to be utilized in policy-making in the Diet (as attached materials to administrators' testimony before the Diet).
Moreover, in order to improve functions of legislature, people's enhanced political awareness is essential. Accurate and timely information is necessary to let market work effectively, and likewise accurate and timely information is necessary for electorate. It would be advised to promote a campaign to evaluate members of the Diet from the side of people. At the inception, this kind of evaluation would be made on trial and error basis, but sometime later it is expected that developments of these campaigns may bring about any reliable evaluation procedure and trustworthy scores for individual members of the Diet.
3-4. Importance of social solidarity
If the market economy is misconceived as laissez-faire and in the name of restructuring it results into closure of places providing employment, which supports workers' livelihood, or it continues widening discrepancies between the rich and the poor, such a market economy would be regarded as unproductive. In the course of economic crises in Asian economies, they have been gradually paying attention to the fact that ordinary citizens who are not responsible for the crisis are faced to severe difficulties, and thus the importance of social safety net is being claimed.
In letting market economy manifest its dynamism, it is necessary for us to look to the role played by stable employment. Manifestation of entrepreneurship is of course important, while funds, skills, management of organization and various know how are also required to run operations, while skills and managerial know how are accumulated in stable employment. It is solicited that trade unions best aware of the site of labor actively propose suggestions while armed with entrepreneurship, and management listen to these suggestions. Based on social solidarity and the "high road approach (chain of sophisticated skills (higher productivity), higher wages and higher reliability)" aiming at positive adaptation to globalization, trade unions must respond to globalization in a forwar-looking attitude without dispirited at the pessimistic view of the Japanese economy close to their feet.
4. Projection by RIALS's Macro Econometric Model
Scenario A (positive response) assumes that reductions in financial burden borne by households in the magnitude of \10 trillion are materialized through income tax reductions and the increase in child allowance, and at the same time that in compilation of fiscal 1999 budget, public works budget equivalent to that authorized in fiscal 1998 supplementary budget plus \2 trillion is earmarked. Wage increase in the spring labor offensive is assumed to be 3%, including regular pay raise. In this scenario, supported by government expenditures and a steady increase in household expenditures on consumption and housing investment, real economic growth rate is forecast to achieve 1.2% in fiscal 1999 and 2.2% in fiscal 2000 to provide a prospect of economic rebirth with growth rate of 2 to 3% in fiscal 2000 and subsequent years. Also, even though employment situations are not substantially improved by fiscal 2000, unemployment rate peaked in fiscal 1998 at 4.6% is gradually declining and a 3% rate comes to within the range.
In Scenario B (retrenched thinking), fiscal policy measures remain within the framework of the government policy currently made public and employers restrain, on the plea of restructuring, wage increase in the spring labor offensive to zero. Under this scenario, consumption expenditures turn to increase due to the effect of the \4 trillion income tax reduction initiative, but their growth remains slow affected by the decrease in incomes earned by employees, and real economic growth rate is forecast to be -0.4% in fiscal 1999, so that negative growth continues for three consecutive years since fiscal 1997. In fiscal 2000, economic growth remains at as low as 0.5%, and it is impossible to delineate the scenario of economic rebirth within this century. Furthermore, even with restraints on wage increase, the resultant stagnant incomes and consumption expenditures serve a continuation of sluggish economy, so that stability of employment is not assured and employment situations are further worsened to bring unemployment to the 5% level.
Also, this scenario implies such risks that malfunction of financial systems further depresses investment and jobless workers increase substantially as a result of bankruptcies due to credit crunch, and such possibilities that turmoil of the world economy is further deepened to cause downward swings of world trade. Such a risk of downward swing of world trade is higher in Scenario B which does not provide any prospect for economic rebirth than Scenario A. Taking into consideration the presence of the risk of this downward swing, the government is required to watch closely developments in business, and, if necessary, take without delay additional boosting measures.