Asia Times: EDITORIAL: 'Constructive optimism'



	January 22, 1999	atimes.com

Japan Economy

EDITORIAL: 'Constructive optimism' - anything else?

''The time has come for us to end this excessive pessimism,'' said Prime Minister Keizo Obuchi in his keynote speech at the opening of the regular session of parliament on Tuesday. ''What is needed right now is constructive optimism with unwavering resolution,'' he explained. Economic Planning Agency Director-General Taichi Sakaiya tooted into the same horn: ''What Japan needs now is self-confidence and a dream for the future.'' In his agency's January report he asserted that, ''Faint stirrings of economic upturn became a little clearer."

With a somewhat perplexing sense of causal relations, the Tokyo office chief of Morgan Guaranty Trust Co., Takeshi Fujimaki, took issue with Sakaiya and complained: ''Calling a weak economy strong is counterproductive and will hamper an economic recovery by boosting the yen and interest rates."

But politicians' flowery language - the ''Obuchi flavor'' - and commentators' unintentional humor appear to be just about the only relief available as one watches the Japanese economy stagger along. Look as hard as you may, but aside from a few more electrical appliances and condominiums sold, there is nothing in the EPA report to qualify even for faint stirrings.

On the negative side, massively higher long-term bond yields and the higher yen will almost certainly produce further slow-down effects in the first quarter and beyond. The government will issue 31.5 trillion yen in new bonds this year to finance its pump-priming programs; a collapsing bond market will have every chance of undoing the growth impulses so created - a wonderful variant of a liquidity trap!

There are, nonetheless, some basic reasons for optimism, most importantly the fact - as Minister for Financial Reconstruction Hakuo Yanagisawa, head of the government's Financial Reconstruction Commission, said on Wednesday - that major banks are making very significant progress in bad-loan writeoffs. With the injection of public recapitalization funds, he noted, re-establishment of a ''solid, highly competitive, reconstructed financial system'' is in sight.

A second factor is political: The new Obuchi-Ozawa (LDP-Liberal Party) coalition makes for a very solid majority in the lower house of parliament for more decisive action and has at least the makings of the adoption of more far-reaching tax reform amd tax relief measures than are now in place.

The lesson to be learned and acted upon is that pump-priming in the context of high-tax regimes is largely futile and tends to produce liquidity traps as now witnessed. In the context of decisive individual and corporate tax cuts, on the other hand, it can kickstart the economy onto a sustained growth path with deficit worries soon abating.

It makes little sense to compare the still highly regulated Japanese economy to the American one even of the late1970s and early '80s. Tax relief alone does not create entrepreneurs. But it doesn't hurt and the Obuchi-Ozawa team would be well-advised to take a closer look at the Reagan-era policies of tax-cuts and deficit-spending.

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