May 25, 2001｜Japan
Advisor, Japan Center for Economic Research Chairman of the Board of Trustees, ERINA
In its monthly report for May, the Japanese government revised its economic forecast downward claiming that its economy was weakening further. It was pointed out that the reason for this was that the amount of exports has decreased due to a slowing U.S. economy, and as a result of this, capital investments have reduced its speed. A decrease in public investments may be another reason for the economic slump. With regard to public works between January and March 2001, the fifty major companies’ order volume from the government and other public offices drastically decreased 17.4% compared to the corresponding period of last year. Reflecting this, during the January-March period, mining and manufacturing production decreased 3.7% compared to the previous period and 1.1% to the corresponding period of last year. Producers’ stock of products rose 2.3% from the previous period and 3% from the corresponding period of last year. It would be more accurate to describe the actual situation as an economic slowdown rather than a weakening. In the economic forecast published on May 3rd, the OECD stated that Japan’s economic growth rate for 2001 was 1.0%. As it was forecasted to be 2.3% last autumn, it was a big downward revision.
The Koizumi administration took office amid these circumstances. Mr. Koizumi emphasizes the importance of structural reform of the economic policy and claims that without structural reform there can be no economic recovery.
This structural reform centers around the terminal treatment of bad loans, radical deregulations and the reform of the fiscal. In terms of finance, he also aims to restrain the scale of governmental bonds to within 30 trillion yen. Many people are in agreement with this.
It is dangerous, however, to promote structural reform monotonously. The present decline of the economy is due to a lack of demand centering on exports. Although structural reform is necessary in the medium-term, from the short-term perspective, he should not employ a policy of reducing demand by reining in government disbursements. Otherwise, he will make the same mistake as that witnessed in the Hashimoto administration’s structural reform of public finance policy in 1997. The Hashimoto administration introduced stringent policies, such as tax increases and across-the-board annual expenditure cuts, which exacerbated the recession and decreased tax revenue, and consequently, the structural reform of public finance failed. I believe that the government should push ahead with policies such as the abolition of regulations, however, while reexamining government disbursements, they should continue with the expansion of the total amount and make steady progress with the sorting out of bad loans amid the recovery of the economy.
The OECD was also advocating Japanese financial retrenchment, however it changed its adjustment this year. It asked for top priority to be given to the turnaround of the economy, asserting that fiscal stimulus should be sustained throughout the year, and requested that financial reconstruction be set as the strategy for the medium-term.
Although the actual policies of the Koizumi administration have not yet been clarified, there is a possibility that they will not be as extreme as he asserted during his campaign to be elected as LDP leader. He appointed Mr. Taro Aso, who fought with him during the election campaign advocating the expansion of public investment, as the Chairman of the Policy Research Council. Moreover, Mr. Heizo Takenaka, a well-balanced economist, has become the cabinet minister responsible for economic and fiscal policy. It is expected that Koizumi will take these people’s opinions into consideration and keep a watchful eye on both the economic recovery and structural reform, while promoting his policies, without running ahead of the pack as Hashimoto did. It seems that the consumption downturn has stopped. There also is a possibility that the downturn in the U.S. will not be so bad as previously thought. If Japanese policy does not worsen the stagnation in the economy, Japan’s own downturn may well stop earlier than expected.
[Translated by ERINA]