Sunday, June 24 9:52 AM SGT
Koizumi's team looks to
supply-side economics to
transform Japan
TOKYO, June 24 (AFP) -
The team behind Prime Minister Junichiro
Koizumi, who aims to shake the dust off
Japan's stagnant economy, has chosen a
vintage broom with which to do it.
Breaking with the tradition of ten
unsuccessful years of "Keynesian"
demand-side economics, they are now
looking towards the blunt supply-side
methods used by Ronald Reagan's
government to beef up the US economy.
A programme of structural reform unveiled
last Thursday by State Minister for Economic
and Fiscal Policy Heizo Takenaka, drew
obvious inspiration from the approach
dubbed "Reaganomics" after the US fiscal
policies followed during the double term of
the former president.
This approach was characterised by rampant
deregulation and tax reforms -- handing the
baton of economic initiative to the private
sector.
"We are going to implement explicit
supply-side policies," professor Takenaka,
an economist with the prestigious Keio
University, told foreign reporters.
Since the 1990 collapse of the 80s
speculative bubble, conservatives within the
ruling Liberal Democratic Party (LDP) had
attempted to prop up the ailing Japanese
economy with large, sustained doses of fiscal
stimulation.
This strategy consisted of throwing
unrestricted quantities of public cash into the
backward economic and social sectors which
traditionally support the LDP, delaying the
major structural adjustments undertaken in
the meantime in the US and Europe.
In addition, it led to the ruin of public
finances, instilling in Japanese consumers a
fear of tomorrow, subsequently reflected by
an unchecked rise in savings rates.
"Japanese consumers are perfectly rational.
They are considering their life cycle of
income," said Takenaka
"The only way to increase the life cycle
income is through deregulation and
supply-side reforms," he added.
"In the long run, the only way is to promote
supply-side reform."
In other words, the revival of private
consumption, which counts for more than 60
percent of the Japanese gross domestic
product, requires the offer, on the initiative of
the private sector, of new products and
services, to generate new employment.
Endorsing studies by economist Haruo
Shimada, another leading light at Keio,
Takenaka's programme asserts that five
million new jobs could be created by
extending the IT revolution and developing
services to enhance people's livelihood.
This would more than compensate for the
hundreds of thousands lost in traditional
sectors -- such as construction, distribution
and real estate -- expected to suffer most
from the banking sector bad loans disposal
programme, a priority of the Koizumi team.
The first of seven chapter headings of the
structural reform programme focus on
privatization and deregulation. The Koizumi
team has already displayed the will to tackle
"sacred cows," such as the postal system and
dozens of state-dependent bodies which
form Japan's enormous public sector.
The tax reforms will have to encourage
risk-taking, entrepreneurship, and individual
initiative.
"Full scale tax reform will have to wait two or
three years," admits the minister. But, he
adds, "but some tax reform to provide some
kind of incentives will come this year and
next year."
Socially, this new direction in Japanese
economic strategy should benefit the urban
middle class in large cities, which deserted
LDP's candidates over the past few
elections.
But resistance could be strong in sectors
heavily reliant on public subsidies, particularly
rural areas and regulated and protected
industries.
The prime minister has pledged to cap at 30
trillion yen the net issuance of government
bonds, which implies deep cuts in public
expenditures. Rigid allocation of fiscal
resources, such as the road tax, will be
reformed, to the detriment of rural areas.
And regional and local authorities will be
granted more power, but also less money
from the central government's coffers.
"There are groups with vested interests not
only in the LDP but also within the opposition
parties," said Takenaka.
The success of the plan "depends entirely on
the leadership of the prime minister", he said,
adding that "popular support is quite
important since we are living in a democratic
society."