February 28, 2003


The right man to reform and revive Japan: The appointment of Toshihiko Fukui as governor of the Bank of Japan is a positive step (Richard Katz, 2/28/03, Financial Times)
It is hard to see how Japan's economy can reform and recover unless reformers are put in charge of vital policymaking institutions. That is why the appointment of Toshihiko Fukui as governor of the Bank of Japan is a positive step. His view is straightforward: deflation cannot be stemmed through monetary easing alone, which makes structural reforms more important than ever.

Even some of those who want the bank to inject "unconventional stimulus" acknowledge it cannot revive the economy by itself. Heizo Takenaka, minister for economic policy and financial services, has made it clear that monetary easing will not suffice without the disposal of bad debts. So has John Taylor, undersecretary for international affairs at the US Treasury.

Mr Fukui will bring more to the table than the reformist philosophy he shares with Masaru Hayami, his predecessor. Even critics acknowledge his political acumen, flexibility and a dense network of supporters in politics and business. These assets could make him more effective than Mr Hayami in building consensus for action on bad debts supported by monetary easing.

The main alternative is the futile hope that massive money-printing, like government spending on "bridges to nowhere" in the past, can substitute for real reform. Critics claim that the BoJ could create 3-4 per cent inflation at will and that this inflation would, in turn, revive private demand. Some advocates of inflation targeting even suggest that the bank buy up assets used as collateral for bank loans, from equities to office buildings.

While many economists sincerely believe such measures would help, it is the opponents of reform who are the most fervent advocates. They hope that raising the price of stocks and property can make bad loans good without restructuring "zombie" borrowers - companies that are essentially bankrupt. The more Japan's leaders grasp at monetary straws, the less likely they are to undertake true reform.

Japan's deflation is not the cause of weak demand but a symptom. Prices are falling because the economy is operating at 4-5 per cent below capacity. The bank cannot create steady, manageable inflation just by printing more money. It has tried. It has increased the monetary base by almost 40 per cent since March 2001. Interest rates have responded - the yield on a 10-year government bond is now at a record low of less than 0.8 per cent. But little else has improved. The rest of the broad money supply has barely changed. Meanwhile, bank loans, prices and nominal gross domestic product have all kept falling.

You can't have 0% or less population growth, low immigration, and peoples' money socked away in savings accounts and still manage to reflate your economy. If the Japanese were serious about salvaging their economy and their society, rather than dying out in comfort, they'd criminalize abortion, reward fertility, encourage immigration and create mechanisms like 401ks and privatized retirement accounts. But Bill Emmott and others identified these problems twenty years ago and they've done nothing about any of them--so don't hold your breath. Posted by Orrin Judd at February 28, 2003 8:34 AM

The only possible way to maintain living standards in the face of a shrinking and aging population is to go on a productivity-gain binge such as the world has never seen -- and that is a high risk proposition.

In some ways, Japan is well-prepared for such a binge; but it is impossible in the face of their inflexible labor market and high savings rate. Oddly enough, the only developed nation in which such a binge is not only possible but likely is the US, where it is least necessary.

Posted by: David Cohen at February 28, 2003 9:12 AM

They could make a simple start by letting bad companies die instead of keeping them on life support.

And Koizumi was seen as being a great reformer while he's been a squalid disappointment.

Japan needs a good dose of the Thatcher medicine.

The birth rate might be boosted by making it unnecessary for custom to dictate that Japanese women quit their jobs upon marriage.


Posted by: M Ali Choudhury at February 28, 2003 9:27 AM

Clearly Japan manages to sub-optimize women on both sides of the spectrum: it does not really want them to produce in the work force (were they are sub-employed), but its culture does not seem to appreciate them as mothers either. Thus they stay sub-employed, unmmarried. and childless.

Posted by: MG at February 28, 2003 10:55 AM

Some non-rhetorical questions:

How much productivity does it take to compensate for falling population?

Is GDP the right measure? If falling population exceeds productivity growth, then GDP goes down. But per-capita GDP would simultaneously increase. Which is the most valid measure?

As David has noted, there are huge structural problems.

Finally. If population growth is essential, then doesn't that lead to the same problem delayed, since at some point we would be pushing people into the ocean...


Jeff Guinn

Posted by: at February 28, 2003 12:16 PM


Tokyo and New York are the two richest cities in the world. Replicating their population density we could fit all 6 billion people currently alive into North Dakota. The oceans seem safe for now.

Posted by: oj at February 28, 2003 12:40 PM


Quite true, but for now isn't what I'm concerned about. At some time in the future, population growth will have to become zero.

Besides that, I'm curious about your view on my non-rhetorical questions.


Jeff Guinn

Posted by: Jeff Guinn at February 28, 2003 10:24 PM


On re-reading my questions, I thought some of my wording unusually goofy. What I meant to say was: "If the percentage decrease in population is less than the percentage increase in productivity..."


Posted by: Jeff Guinn at February 28, 2003 10:26 PM

Japan's problems are due to its abandonment of its tax structure it had in the 1970s and acquised to higher taxes, debt, and public spending. This combined with an essentially fascist form of economy firmly in the hands of an economic and bureaucratic elite guarantee the nation will remain stagnant. It needs a Reagan.

Posted by: Thomas J. Jackson at March 1, 2003 3:36 AM