Japan: Let the Fiddler Play On

More on divining the entrails in Japan. Much recent western comment has been mildly optimistic on the possibility of serious change and reform in Japan. Japanese commentators meanwhile, when not actually banging their heads against the wall, seem to spend most of their time tearing their hair out. This piece from the Asahi Shinbun's Senior Staff writer is pretty typical. If they're even halway right it looks like the best we can hope for is more fudge. It seems Duisenberg isn't the only one to be busy fiddling while the empire burns.

British writer Thomas Carlyle, who lived in the same period as Karl Marx, called economics ``dismal science.'' The epithet may well apply to the current economic debate on deflation in Japan. One gets the impression that the nation's economy is going nowhere. The underlying problem seems to be a policy stasis that stems from the inability of policy-makers to draw up a unified blueprint for action. The sense of paralysis was evident at the symposium held last month at the Finance Ministry under the theme: Challenges for Japan's Economy-Deflation and Economic Policy. Symbolic of the policy paralysis is the standoff between the government and the Bank of Japan over ways of beating deflation. Government officials feel this way: ``We are taking steps such as tax cuts. Now it's the BOJ's turn to follow up.'' But central bank officials are deeply suspicious of the government. Their feeling is: ``We could be left holding the bag trying to generate inflation.''The discord came to a head at the symposium, creating acrimony among the participants. Academic panelists demanded that the BOJ change its monetary policy, but some in the audience-politicians and BOJ people-reacted sharply, saying it is wrong to blame only the central bank for inaction. A truce of sorts was called when University of Tokyo professor Hiroshi Yoshikawa, a panelist and a member of the government's Council on Economic and Fiscal Policy, said, ``The important thing is for the government and the Bank of Japan to put together a unified package of measures to remove uncertainties over the future.''

The question is specifically what kind of anti-deflation program should be worked out. If it turns out to be a hodgepodge of halfway measures, the economic situation will become gloomier still. For example, a mere increase in public works investment-a prime example of distorted resources allocation and wasteful spending-would only make things worse. On the other hand, aggressive measures focused on generating inflation could end up creating ``stagflation''-a combination of recession and inflation. What is needed is a bold plan of action-namely, a forward-looking, reform-oriented program to fix deflation. Reform means dismantling the ``construction state''-the bloated system of public works projects-and increasing investment in other areas such as environment, welfare and education. Along these lines, utmost efforts should be made to foster industries of high growth potential and create new jobs.
Source: Asahi Shinbun
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