Another Lost Decade?
Japan’s announcement yesterday of a 27 trillion yen ($275 billion) stimulus package signals the death of economic reform in the world’s second-largest economy. The ruling Liberal Democracic Party has put the days of Junichiro Koizumi and any hope of near-term renewal behind it.
Prime Minister Taro Aso could have watched his predecessor’s stimulus package and learned that Keynesian economics doesn’t stimulate much of anything. Shuffling money from public to private coffers does nothing to encourage the virtuous cycle of rising domestic investment, production and consumption that Japan needs. That’s why transfer payments aren’t included in GDP.
No matter. The LDP is thinking of its own neck, not the prosperity of its citizens. Mr. Aso must call an election by next September, and pork barreling for votes doesn’t hurt. Yesterday’s stimulus package included 2 trillion yen in straight cash handouts to households, breaks on mortgage loans and cash transfers to municipalities, among other things. The only good news is that of the 27 trillion yen total, “only” 5 trillion yen represents immediate disbursements.
Mr. Aso will pay for these goodies by sucking funds from government slush funds and promising to raise consumption taxes. That, in itself, will mitigate any positive effect of the stimulus, as consumers are more likely to save their handouts in anticipation of higher taxation. Yet Mr. Aso won’t encounter much resistance. The opposition Democratic Party of Japan is in disarray, and he has embraced his party’s old guard. Two MPs who opposed Mr. Koizumi signature postal privatization reform — Hirofumi Nakasone and Seiko Noda — sit in Mr. Aso’s cabinet.
This is not a crowd that will enact radical reforms when times get tough. Witness what happened this week, when the Nikkei dropped toward 7,000 and Japan’s big banks realized their stock portfolios weren’t worth as much as they used to be. Mitsubishi UFJ Financial Group rushed to market to raise $10 billion to cushion its capital base less than two weeks after it paid $9 billion for a stake in Morgan Stanley.
Instead of telling the banks to re-examine the wisdom of cross shareholdings — a legal form of bribery particular to Japan whereby banks may hold a client’s shares in exchange for a better “relationship” — the government said it would examine the prospect of purchasing banks’ shares, as it did in 2002. Mr. Aso’s tribe is also mulling the injection of public capital into regional banks, which are hurting as rural regions feel the bite of the economic slowdown. So much for bolstering market discipline in the financial system, the lifeblood of the economy.
It could get worse. Mr. Aso’s government has also bowed to industry calls to examine the rollback of mark-to-market accounting standards. This would signal a return to the 1990s, when Tokyo allowed banks to hide their losses behind opaque accounting practices, and raise suspicion that the days of the zombie banks are back. Changing accounting rules in the midst of a market panic also won’t solve Japanese banks’ underlying problem of poor risk management and crony capitalism.
Mr. Aso cannot tax, spend and fudge Japan back into prosperity. What his government needs now is a strategy for economic growth — a job he has implicitly abrogated to the Bank of Japan, which is under pressure to cut rates today. It’s the central bank’s job to keep prices steady, not to stimulate growth, and at 1%, there’s not much room to cut. Mr. Koizumi’s reforms are forgotten, and another lost decade may be beginning.