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http://makeashorterlink.com/?G3A02199 Transcript: Interview with Heizo Takenaka David Pilling interviewed Japan's Minister of State for Economic and Fiscal Policy in Tokyo Published: March 27 2002 13:13 | Last Updated: March 27 2002 15:33
Spring is in the air and there is talk of the economy bottoming out. Is the worst over?
We have to watch very carefully the indicators. I have an image of the Japanese economy in the following way. The US economy is recovering very quickly and, also again influenced by some Asian countries like South Korea, we see some signs of recovery in the second half of this year.
There are some good signs - but this is mostly the result of cyclical movement. In Japan inventory adjustment is proceeding.
Special report For latest news and background on Japan's faltering economy click here The declining trend of production and exports is going to stop and as far as cyclical movements is concerned we are moving in a better direction.
However, we are not yet in the stage of recovery. But decline is going to stop. We'll have to watch very carefully what kind of indicators will follow.
There's been a pattern over the past 10 years in which we've seen a number of recoveries, but each time they've been shallow and shortlived. Will this one not be the same?
That's a real problem. As far as cyclical movement is concerned, we are going in the right direction, but the real problem is the fundamental growth trend, or the potential growth.
>From 2000-2001, the US economy went down from 4 per cent to 1 per cent
(minus 3 per cent), Europe 3.5 per cent to 1 per cent (minus 2.5 per cent)
and in the case of Japan 1.5 per cent to minus 1 per cent (again minus 2.5
per cent). The extent of decline was very similar between the US, Europe and
Japan. The real problem was that the basic growth trend was very low in the
case of Japan.
At the peak of the cycle the US economy grew 4 per cent but in Japan it grew only 1.5 per cent. That's the problem.
So the real task for us is to increase the growth potential of the economy. This is the real purpose of structural reform to strengthen the supply side of the economy to increase productivity, to enhance resource allocation. We have to lift the potential growth rate itself.
The Koizumi administration attaches great importance to this task of structural reform. We are now in the process of this reform. In some areas the speed is relatively slow, less advanced [than we would like]. The difficult area is the writing off of non-performing loans.
This is the reason why last month we launched an anti-deflationary policy, focusing on monetary issues.
On the subject of NPLs, how does writing them off increase the growth rate of economy?
We are now discussing the long-term growth path. This is mostly decided by the trend of supply side. In the process of writing off NPLs, there could be some negative impact on the demand side, but this is very short term. Beyond this possible negative impact on demand we have to realise that long-term sustainable economic growth [is the goal] If we accelerate the speed of writing off NPLs, this would have a very positive impact on the speed of growth of Japanese banks.
Also, to cope with this kind of short-term demand shortage, we have provided a second supplementary budget reaching Y4,000bn. That has a positive impact on GDP growth by about 1 per cent.
There are people that argue that it is irrelevant what you do on the supply side, that the problem is demand and that this is capped by Japan's demographics?
There's no mainstream economist who is strongly advocating the need for strong demand side measures. Please consider the example of the Japanese economy in the 1990s, when the average growth rate was 1.2 per cent. We had a lot of demand stimulating policy. But still we grew only at 1.2 per cent. Do you still think that we are suffering from demand shortage? We are providing a lot of demand but still growth rate only 1.2 per cent.
In the very short term, the government can stimulate demand but that's it. Of course at the same time we are paying close attention to demand side.
There's some concern about the Y30,000bn cap on government bond issuance. What do you think about that?
Y30,000bn is 6 per cent of GDP. We are pursuing a 6 per cent of GDP fiscal stimulus.
But that's a contraction from last year.
No. There's a lot of misunderstanding about this. Most of the supplementary budget will be spent in fiscal 2002. This is not a fiscal contraction. It's almost neutral.
What exactly are the supply side problems you referred to?
Some very inefficient sectors, companies exist. A typical case can be seen in NPL problem. Also the government is very inefficient in [some] activities. Some government affiliate organisations will be abolished or privatised. Also, we have some problems in human capital. We have the perception that the Japanese population is well educated. But for example in the field of IT, we still have some problems about highly advanced education system.
We have a very inefficient government sector and very inefficient allocation of human and financial capital. We have to solve all of these problems.
There could be two types of supply side policy. Reactive or proactive. Reactive, we have to write off NPLs and we have to reduce budget deficit. This is inevitable otherwise the value of JGBs will go down very quickly; but it's reactive.
Proactive is deregulation and privatisation. This will stimulate demand. We have to stimulate this kind of private demand, by tapping the strong vitality of the private sector.
What about targeted tax cut?
I found a very interesting coincidence between Thatcher's reform in UK and Reagan's in The US. They did tax reform in their first year This year we will do tax reform, one year later than they managed.
We attach a great importance to role of tax reform which provides a lot of incentive to the private sector. Stable tax is very important, if we manipulate it very rapidly it could provide a negative impact. We need a very robust, credible, stable tax system, of course considering the incentives of the private sector.
In that process we should consider a much flatter tax system. We have had a very progressive tax system. But at the same time we are ready to pay special attention to investment incentives and human capital, risk money investment. But we also have to be careful of budget deficit implications.
Are you considering emergency tax cuts in the short term?
I have some sympathy to promote that kind of policy but politically speaking it's quite difficult. It is easy to promise tax cuts now and a tax raise later, but it's definitely difficult politically. The second best choice is to provide a very stable tax system. That's my current idea.
If we decrease our expenditures this money should be spent on a tax cut. This is tax revenue neutral. And based upon this I would like to make use of tax incentives, focusing on investment, risk money and human resources. This is exactly what we are planning.
At the same time in the long run we have to restore the primary balance and pay attention to the stability of the tax system.
Are you expecting any serious problems next April when the blanket deposit guarantee is lifted?
According to research, there's no drastic move of deposit money. My understanding is that depositors are behaving in a very reasonable manner. And the Financial Services Agency has already finished preparation.
Much more important is to accelerate the speed of [writing off] NPLs in order to finish this NPL problems. It is my understanding that the Prime Minster himself is very eager to accomplish this job.
Special bank examination are now being done. Based upon result we are going to take decisive steps.
You've said that before. What kind of steps do you mean?
This will come out in about a month or so and based upon this result, if some shortage in equity is found, if some bold step is needed from the government? we are waiting for those results.
Is this less likely given the recent stock market rally?
Stock prices went up recently. This will help the banking sector.
At the same time we have to recognise this stock movement is still very fragile. During the period stock prices are high we have to accelerate the speed of writing off bad loans.
Going back to the economic cycle, where do you see things going?
We published growth rate figure for the fourth quarter of last year. Minus 1.2 per cent. We are predicting zero for fiscal 2002.
In second half of fiscal year we see some kind of recovery. We cannot escape from cyclical movements. Even for British, American and Chinese economy we have [this]. But our task is to increase the potential growth rate. It will take maybe two years or so before seeing the result of our effort.
But if people and the market recognise that the Japanese economy is heading in the right direction, then even if we go into a decline again cyclically, this damage will not be very serious if we have created expectations that the potential growth rate is going up.
Does Mr Koizumi have the public support needed to push these plans through?
The approval rate for Mr Koizumi's government declined, but it's still around 50 per cent. That's very stable compared with the past. I'm very confident people will continue to support him because Mr Koizumi's prescription is the only scenario in which the Japanese economy can survive.