Japan Institute for National Fundamentals

Policy Proposals

2009.11.05 (Thu)

Policy Proposals to New Japanese Government (Economic Policy)

October 14, 2009

[Policy Proposals]

  1. Offer a future vision based on firm confidence in market economy.
  2. Support the beneficiaries pay principle and develop a medium to long-term growth strategy.
  3. Specify secure financial resources for permanent policies.
  4. Set fiscal consolidation targets and develop a fiscal consolidation plan.
  5. Reaffirm the significance of deregulation and structural reforms and implement them boldly.

1. Offer a future vision based on firm confidence in market economy.

In Japan in the 21st century, economic burdens on the people are bound to increase due to population decline, the dropping birthrate, the aging population and huge budget deficits. At the same time, Japan will have to confront globalism that is expected to expand further. In order to adapt to such situation, Japan will have to improve its international competitiveness and sustain economic growth to expand the pie for redistribution.

But the new government's economic policy amounts to "redistribution without growth," reminding us of old-fashioned social democratic welfare state policies that were deadlocked in the absence of economic growth. Historically, market economies have created massive wealth. No other system has outperformed the market economy system. At present, the market economy system is the most efficient conceivable system.

In fact, in recent years, market competition has widened social and economic gaps. But it has clearly led to more efficient production methods, bringing about more benefits.

Japan must deepen its market economy to solve its two fundamental challenges -- the development of a system to achieve a good balance between a shift to sustainable stable growth and social security meeting the falling birthrate and aging population, and structural reforms (shifting resources to higher-productivity sectors) to realize such system. Therefore, the 21st century vision of the Japanese economy should build on firm confidence in market economy before appropriate safety nets are incorporated into the vision.

2. Support the beneficiaries-pay principle and develop a medium to long-term growth strategy.
(1) "An end to dependence on bureaucrats" alone cannot lead to a path to economic revitalization. As a matter of course, the elimination of wasteful spending is important. If savings from this elimination are used for income redistribution alone, however, economic recovery or growth may remain difficult to occur. Some strong supply-side policy should be taken to raise Japan's growth potential.
(2) The "childrearing support," "effective elimination of senior high school fees," "abolition of expressway tolls" and other spending measures to benefit a limited range of citizens or groups cannot be expected to have any major economic expansion effects.
These measures could affect the future vision as they represent the fundamental issue involving the restructuring of values about “burdens that should be shouldered by the entire society” and “burdens that should be shouldered by individuals.” The government should not be allowed to take any easy or onrushing income redistribution measures for the reason of temporary social or economic changes.

(3) The government lacks macroeconomic policy (including short-term economic stimulus and long-term growth measures).
“Childrearing support” and other planned measures represent nothing more than “redistribution.” Unless new private sector demand is created and expanded, economic recovery or growth cannot be achieved. Supply-side reforms including substantial deregulation and structural reforms are required to create new demand. Particularly, structural reforms are required in agriculture, and health and nursing care areas.
It is feared the Japanese economy will deteriorate further toward the second half of the current fiscal year. Most of the measures now under discussion relate to the budget for the next fiscal year. Few economic stimulus measures required for the immediate future have been offered.

(4) The proposed debt moratorium bill (a bill for measures to counter a credit crunch or withdrawal) could violate market economy principles. Resources for loans are mostly deposits. If the planned debt moratorium leads financial institutions to weaken or go bankrupt, public funds may have be injected into them to the disadvantage of not only depositors but also the general public.
At a time when the Bank of Japan is planning to end various corporate finance support measures introduced to counter the global financial crisis, the debt moratorium can be coupled with tougher capital adequacy regulations for financial institutions to trigger a credit crunch. Measures to counter a credit crunch or withdrawal should focus on the expansion of lending by government financial institutions and the improvement of loan guarantee systems.

3. Specify secure financial resources for permanent policies.

Attempts to separate temporary and permanent financial resources have failed. Temporary financial resources will dry up soon. Will there be any financial resources other than tax hikes then? "Hidden treasure" special account reserves worth 5 trillion yen, which were specified as financial resources in the campaign manifesto of the ruling Democratic Party of Japan, amount to a hike of some 2 percentage points of the consumption tax rate. Most of financial resources secured by the government are from a partial suspension of a large supplementary budget formed by the previous government. Whether massive financial resources could be secured through the reconfiguration of the main budget is still uncertain. The DPJ-planned reconfiguration of the budget to eliminate wasteful spending alone cannot ensure growth. It is irresponsible for the government to fall short of proposing any growth strategy or specifying financial resources over a medium to long term.

4. Set fiscal consolidation targets and develop a fiscal consolidation plan.

It will be difficult for Japan to get on a sustainable growth path without fiscal consolidation. Since savings from the "reduction of wasteful spending” and "hidden treasure" are set aside for new policy measures, there may not be any financial resources other than tax hikes for fiscal consolidation. As the government has vowed to refrain from raising the consumption tax over the next four years, fiscal consolidation is expected to start around 2014 at the earliest. Fiscal consolidation will be difficult without comprehensive tax reform.

In order to put Japan on a path to sustainable growth , the government should make a plan to create a primary budget surplus and should promptly work out fiscal consolidation targets and a plan for their attainment.

5. Reaffirm the significance of deregulation and structural reforms and implement them boldly.

The DPJ manifesto has failed to touch on deregulation or structural reforms. The growth strategy under globalism should be based on new demand development through technological innovation and competitiveness improvement through deregulation and structural reforms. Deregulation and subsidy reforms are indispensable for the development of agriculture, and health and nursing care areas where demand is expected to increase.

The government should not shrug off essential structural reforms. Efficiency and equity are not mutually exclusive. It is natural to pursue efficiency in order to sustain growth under globalism. It is important to form social consensus on equity standards for the redistribution of fruits gained on efficiency.