December 1, 2001｜Japan
Advisor, Japan Center for Economic Research, Chairman of the Board of Trustees, Economic Research Institute for Northeast Asia
The business climate in Japan is in an extremely serious condition. This is due to a double whammy in the form of the rapid progression of the recession since the beginning of 2001, and the September 11th terrorist attacks on the U.S.
The industrial production index for September was down 2.9% on the previous month, and showed a major decline on the same month of the previous year, down 12.7%. The drop was greatest in electrical machinery, which had dropped by 27.6% compared with the same month of the previous year, but all industries other than transportation machinery are experiencing a decline as well. The export index was down 13.9% on the same month of the previous year, exports to the U.S. dropped by 18.2%, and the unemployment rate for September was 5.3% – a record high. GDP for the period April – June experienced a significant reduction – down 2.9% on the period January – March – but there can be no doubt that there will be a further decrease in the period July – September.
On November 9th, the Government adjusted its forecast of economic growth rate for fiscal 2001 downward from the 1.7% it predicted at the beginning of the year to -0.9%, but I believe that even this is still too high. The slump may well be more severe. The decline in GDP is not only due to the drop in exports. The reasons may be spread throughout a variety of areas, including capital investment, investment in housing, consumption and public sector investment.
In this situation, the Government and the Bank of Japan (BOJ) must work flat out to hold deflation in check. I believe that the BOJ is trying with all its might. The official discount rate is 0.1% and the call rate is 0.003%. With BOJ bond-buying operations totaling ¥800 billion a month and a current account balance of more than ¥6 trillion, there are no other measures that can be taken. In the event that the BOJ published an inflation rate of 3%, there are some members of the government and economists who would strongly support the implementation of monetary policies with this as a goal (so-called inflation target policies), but as the BOJ has stated clearly that it will raise prices, this cannot be expected to stop deflation. Quite the opposite, in fact.
The reason why deflation is not stopping is that there is a lack of effective demand. In order to increase effective demand, it is necessary to mobilize public finances. I believe that, at present, the demand and supply gap is about 10%. It would be helpful if private capital investment and consumption could grow to gill this gap, but under deflation this cannot be expected. The mobilization of public finances is an absolute necessity. Fiscal policy is being implemented in the U.S. and the countries of Asia. In the U.S., fiscal measures worth more than $130 billion have been put in place since the beginning of 2001.
The two available fiscal measures are increasing government expenditure, focusing on supplementing public sector investment, and decreasing taxes; both of these are required. As public sector investment stimulates private sector capital investment and consumption by means of the multiplier effect, it will stimulate the economy by a greater amount than the original increase in public sector investment. In addition, lowering taxes will increase both disposable income and consumption. Some say that fiscal measures are not effective, but that is just an excuse because they do not want to implement public sector investment or tax reductions.
I believe that fiscal measures worth about ¥10 trillion – ¥5 trillion of public sector investment and ¥5 trillion of tax reductions – should be implemented.
The source of revenue for this is, of course, bonds. Ten-year government bonds bear a low interest rate of about 1.3 – 1.4%. The argument that government bonds cannot be relied upon because the country’s debts are growing is a false one.
[Translated by ERINA]