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Commentary (August 16, 2005)

Reform Mantra Mesmerizes

Gregory Clark (Vice President, Akita International University)

Prime Minister Junichiro Koizumi's decision to call a Diet Lower House election Sept. 11 solely on the question of post office privatization is curious. Most post office users agree that the existing service is good, excellent even. Many fear, rightly, that privatization would force closure of post offices in remote rural areas, despite Koizumi's promises to the contrary.

But Koizumi's "real intentions," as they say in Japanese, lie elsewhere. He believes that privatization will stop the corruption and waste that results from the bureaucrats and politicians being able to finance pet projects from the 350 trillion yen -- the so-called zaito funds -- that the post offices collect in savings and insurance premiums. He believes that these funds in the hands of banks and private investors would do much more to revive the economy.

But would private investors rush in to borrow this money? Already the banks are awash with zero-interest funds pumped in by the Bank of Japan to revive the economy. Thanks to the deflation caused by Koizumi's economic policies, investors remain uninterested. So the banks turn around and use the funds to buy government bonds, which then fund more of those official pet projects.

If Koizumi wants to stop corruption and waste, there are many other more direct means available. There is no need to throw out the baby of an efficient post office system simply to remove any dirty bath water that might be involved. But Koizumi and his economic guru, Heizo Takenaka, have a further argument: They say that the lack of demand hobbling the economy is simply due to investors and consumers being spooked by big government -- Japan's deficit spending on public works in particular. Privatize, cut budgets and deficits, and people will eventually drop their reluctance to spend and invest. The economy will take off again.

But it is precisely the present policy of cutting spending and imposing other alleged reforms -- forcing banks to dispose of bad loans in particular -- that has caused deficits to increase and the economic slump to deepen. As for the present mild economic upturn, it is mainly due to stimulus from the U.S. and Chinese economies, and population aging, which encourages people to draw down on excessive savings.

It is these excessive savings -- part of the monstrous 1,400 trillion yen in personal financial assets -- that are at the heart of Japan's economic problems. True, part of Japan's high savings propensity is due to worry-wart fears for the future. Genuine reforms might eventually ease some of these fears.

By far, though, the main reason for excessive savings is the way most Japanese have long preferred to save rather than indulge in the big-ticket lifestyle spendings that sustain most other advanced economies -- luxury houses, second houses, yachts, garden swimming pools, expensive vacations. Since this spending reluctance is largely cultural, it is unlikely to be changed by such things as post office privatization.

In this situation Japan has little choice but to rely on public spending to fill the demand gap. Many point to the 700 trillion yen-plus in official debt already caused by this spending. But this is only half of 1,400 trillion yen figure for personal financial assets. If that 700 trillion yen had not been spent, Japan's economy would be in far worse shape today than it is.

Some point to the waste when government uses those funds. But most economic activities involve waste in the sense that they have little direct productive result -- spending on festivals, armies, monumental buildings, lifestyle and welfare, for example. The benefits are indirect, via the spending on food, housing, education etc. by the recipients of funds from that "wasteful" spending. The economic cycle continues. It only stops if the funds are not used, as in Japan.

Even if half the funds used to build roads and harbors around Japan was wasted, that would do more for the productivity of the Japanese economy than funds spent on armies, luxurious lifestyle etc. Zaito funds in the hands of private banks during the bubble economy would almost certainly have ended up financing more golf courses and resorts bound to go bankrupt later. Instead, they went to build highways and bullet train lines. Which was better for Japan?

Some point to the problem of repayment of deficit spending. But several points are involved here. One says that to the extent an economy is revived by deficit spending, tax revenues increase and public debt can eventually be cut -- as in the United States under the policies of the former Clinton administration.

But a far more important and less realized point is that in a situation where chronic lack of domestic demand threatens chronic deflation there is nothing to stop a government from simply creating money -- as the Bank of Japan is doing today. Instead of pushing this money into the hands of the private banks, which do not need the money and will have to repay it anyway, the BOJ should be pushing it directly into the hands of the government, which does need the money and does not have to repay -- provided there is no threat of inflation.

Sadly, none of this is likely to make much impression on Japan's emotional public and lightheaded media. Most remain mesmerized by Koizumi's impassioned mantra of structural reform, and believe that post office privatization is crucial to that reform. Few seem to have noticed the failure of Koizumi's much-publicized pledge four years ago to not allow, under any circumstances, the government to issue deficit bonds in excess of 30 trillion yen. Currently it is around 35 trillion yen.

Memories are short in Japan. Meanwhile, Japan faces the 60th anniversary of yet another impassioned mesmerization disaster.

(This article appeared in the August 15, 2005 issue of The Japan Times)

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