December 15, 2006; Volume 02, Number 44
of the
Japan Considered Podcast
[Listen to the audio file by clicking here]
Clink Links Below for Today's Topics
| Introduction |
| Public Approval of the Abe Cabinet Continues to Fall |
| SkypePhone Interview with Dr. Edward Lincoln on Japan’s Economy |
| Concluding Comments |
Good Morning from the Beautiful Campus of the University of South Carolina. Today is Friday, December 15th, 2006. And you are listening to Volume 02, Number 44, of the Japan Considered Podcast.
Thanks for tuning in. I’ve got a special treat for you this week, and it isn’t bluegrass. Day before yesterday I asked Dr. Edward Lincoln, arguably the best known American scholar of economic Japan, to provide four or five minutes of comments on Japan’s economy and the Abe Cabinet’s economic policies. That conversation, conducted over the SkypePhone, turned into more than thirty minutes of commentary.
As usual, I opened the sound file in Adobe Audition, with the intention of saving only the few minutes of genuinely useful material. Well! It soon became clear that ALL of it was useful. And interesting. For economists, political analysts, and even those listeners who have only a general interest in Japan. So, I’ve left the interview pretty much as is for this program. It’s a winner.
Public Approval of the Abe Cabinet Continues to Fall
Before we get to Ed’s interview, though, a couple of comments on the continued decline in public approval of the Abe Cabinet. All reports of reliable opinion polls in Japan that I’ve seen confirm this trend. Public approval is going down; public disapproval is going up. The degree of decline tends to vary with the political orientation of the institution sponsoring and reporting on the poll. But all of them are down. Below 50 percent approval ratings, now, in mid-December.
This is important. More important than it was in the past. The era during which a Japanese prime minister can survive with single-digit public approval ratings is over. Probably, never to return. Non-Factionist, or anti-Factionist, LDP prime ministers rely far more on public approval to maintain their positions than did their Factionist predecessors. So, while a decline in public approval of the incumbent cabinet was always reported, and significant. It’s more important now than ever before.
This, of course, leads to greater politicization of the polling process, and reporting of poll results. I was amused earlier this week to see one of Japan’s weekly magazines prominently reporting the results of what they described as a “Yahoo Internet Survey.” The article reported that only ten percent of the participants in the survey approved of the Abe Cabinet.
Now, the results of the survey are hardly surprising. Or significant. Such surveys hardly poll populations even remotely representative of the general public. One could compare this with an American Right Wing internet site sponsoring an approval poll of Senator Hillary Clinton.
What was significant, I think, was that the results of the poll were reported at all! A clear demonstration of the politicization of the public opinion polling process, if we needed one. It also would be interesting to know if the spread between polls conducted by more conservative and more liberal sponsoring institutions is widening. Or has widened, during the past five or six years. But I don’t have that data at hand.
So what? Well, this decline in public approval of the Cabinet should encourage the Abe Administration to re-examine its relationship with Japan’s attentive public. Something is wrong. Failure to correct the problem, or efforts to blame the drop on Japan’s communications media, will lead to further decline in public approval. Which might well spell the end of the Abe premiership.
It’s clear that Prime Minister Shinzo Abe lacks Junichiro Koizumi’s personal flair for publicity, and public relations. Koizumi was about as conservative in his politics as is Abe. But he made his conservative policies more palatable to Japan’s attentive public by his personal behavior. His roguish haircut, air guitar strumming performances, and trips around the Kantei grounds on a skateboard, had important influence on public perceptions of his persona. While a little outlandish, at least he didn’t appear to be “prissy.”
Koizumi also recognized the importance of highlighting one political objective, and making it his own, so to speak. Abe, it seems, has yet to do that. True, he’s conservative. And he has promised to promote conservative domestic and international policies. But maybe it’s all a bit too vague for Japan’s attentive public.
Today, Japan’s Upper House passed bills that revise Japan’s basic education law and promote Japan’s Defense Agency to full ministerial status. Past LDP prime ministers, including Koizumi, have tried for years to get such bills passed. Well, they were passed today, and the Abe Cabinet can take credit for their passage. It will be interesting to see if the Kantei is able to use these legislative successes to improve their public approval ratings, or not. We’ll have to defer further discussion of this issue until next week.
SkypePhone Interview with Dr. Edward Lincoln on Japan’s Economy
Now, though, let’s get right to the interview I did this Wednesday with Dr. Edward Lincoln. It’s chuck full of valuable information and interpretation for us.
RCA: Good afternoon, Ed. Thanks for joining us on the Japan Considered Podcast from your office in New York. What’s your new position?
EL: I’m a professor of economics, and I am the director of the Center for Japan-U.S. Business and Economic Studies, which is part of the Stern School of Business at NYU.
RCA: Congratulations to the Stern School. They’ve made a wise personnel decision. And I hope you enjoy the position.
EL: So far, I have.
RCA: Glad to hear it. If you have just a few minutes to talk with us about your take on general economic issues related to Japan, and economic policy issues. You’re one of the very economists in the country these days who’s competent to talk about both the political and economic aspects of this. Speaking of economists, what about the economists who now are involved in the Abe Cabinet. Any thoughts on them?
EL: This is an interesting question. Because the predominant reaction to Prime Minister Abe has been one of concern. Both by the media, and I think, to some extent, by academics. The concern is that there was a sense of momentum on structural reform and economic policy during the Koizumi years that may be lost with Mr. Abe coming in. We certainly know that he didn’t have an economic agenda coming in. He’s only known for foreign affairs. So, the interesting thing is that there are, at least some economists attached to this Administration who are very much interested in economic reform. He has, for example, Mr. Shiozaki, who has a Bank of Japan background for a number of years before he left to go into politics. He is regarded as very competent on economic issues, and very much interested in further economic reform. There is Takatoshi Ito, who, again, if I’ve got it right, is a Member of the Council for Economic and Fiscal Policy. Itoh is a macro economist. But he’s also been on the cutting edge of industry deregulation in Japan, from the academic sector. So it interests me that these people have chosen to be associated with this government.
RCA: Do you believe these economists you’ve mentioned will have any influence on the policies of the Abe Administration?
EL: Well, that’s what we have to wait to find out. Shiozaki actually has a cabinet post. Except that he’s not an economic cabinet minister, per se. He’s the chief cabinet secretary. So, it’s not as if he were the finance minister or the METI minister. But certainly he is in a position to be fairly influential, depending on how the interpersonal and power relationships in this cabinet work out.
RCA: The Japanese press since after his appointment haven’t made much of his economic background. So, that’s a useful point.
EL: This could work out any number of ways. It may not be so great. But he may be open to ideas. And this suggests that he could be tugged in different directions. But the possibility that there are some people who might tug him in the direction of continued reform is at least hopeful.
RCA: As a non-economist who all my life has had to listen to economists, it seems to me significant that he actually will know what the economists are talking about. Maybe there won’t be as much blue smoke from them, when they talk to him as there would be for someone like me who doesn’t know much about economics.
EL: Well, perhaps that’s true. But, of course, Koizumi didn’t know much about economics either. The interesting thing about Koizumi that I’ve heard from a number of people who worked in the Japanese government, and had to deal with him, was that he really didn’t want to discuss economic issues for more than ten or fifteen minutes. He just wasn’t interested.
RCA: Sounds sensible!
EL: But what he did do, was provide that overall political … what you political scientists call political cover or overall atmosphere … He uttered the rhetoric of reform and change. So even if he wasn’t particularly interested in the detail, at least he was willing to keep these issues at the forefront of public opinion. And we don’t know how that’s going to work out in this Administration.
RCA: While we’re on the Kantei, do you have any thoughts about the Kantei’s continuing efforts to be more influential in economic policies, and policy overall? How are they doing?
EL: Well, as you know, one of the things that happened in the reforms of the last five or six years, was the creation of a new council on economic policy. This Economic and Fiscal Policy Council. The idea, basically, was to take power away from the bureaucrats at the Ministry of Finance. Throughout the postwar period, the Ministry of Finance has been in charge of fiscal policy. The overall direction of fiscal policy now has been taken away from them and lodged in this Council. Which is supposed to include voices from outside the government.
So that, I think, was seen as a rather significant step. After all, even economists believe that fiscal policy is such a central part of what government does that it ought to get high-level political attention, and not be controlled just by the career officials of the Finance Ministry. So, that was considered fairly significant. And certainly Koizumi made an effort to see to it that the Council did play a big role. For a period of time he had Mr. Takenaka running it. He was quite a colorful economist. Again, we don’t know how it’s going to work out in this Administration. But the structure is there for Abe to use if he should choose.
RCA: Do you believe the Ministry of Finance overall is less influential since the Koizumi era, and since presumably the Abe era, than it was before?
EL: I think so.
RCA: So it’s not just superficial.
EL: No. They lost two important functions. One was this control over fiscal policy. Again, they’re still doing the budgeting. So all of the details in the government budget plan still gets run by the Ministry of Finance. And that’s a very powerful function to have. But, the overall direction of how big the budget is going to be? Should taxes go up or down? What level of government deficit does the government want to have as they go through the budget and tax policy process? Those things got taken away from them. And, the Ministry of Finance lost its control over inspection of the banking system. That was taken away in 1998 with the creation of the Financial Services Administration, the FSA.
Now, a cynic might say the actual loss of power is more apparent than real. Because I know, at least in the case of the FSA, the Ministry of Finance seconding quite a few people to the FSA. So, they have colonized it, in the way that ministries like to colonize weaker agencies. But despite that, my sense is that the FSA, at least in the last four or five years, has acted relatively independent of the Ministry of Finance. That they have developed enough of their own expertise that they don’t have to rely on hints and nudges coming from the Ministry of Finance.
RCA: What about METI? Is METI now up or down, to be crude?
EL: METI probably is about the same. In the big battle over the structural reform of the government, and the great consolidation of ministries that took place. METI came through pretty much unscathed. They didn’t lose anything. And I guess, on balance, they may have gained a little bit. From what they’ve absorbed from other ministries. So, they’re still chugging along, doing the things that they used to do. Including running an industrial policy. It may not be as big or as effective as it once was. But that’s still what they do.
RCA: How about your sense of their relationship with the new Kantei? Are they more or less independent.
EL: Hmmm. Well, I’m tempted to say that there too there has been relatively little change. Since METI is involved in micro policy, they really haven’t lost much of anything to this new Economic and Fiscal Policy Council. Maybe a little bit. But, like the Ministry of Finance, they’ve been doing some colonizing of their own over at this new Council. So they have their own people over there to help steer things. But industrial policy is not really a central part of what this new Council does, or macroeconomic policy, from what I understand. So, I think METI probably is about as independent as it used to be.
RCA: One other issue that seems important to me that we haven’t read much about in the English language press, or even in the Japanese political press, is this debate over the road tax issue. Do you have any thoughts on that?
EL: Yes. I find it very interesting. Japan is not unique in this sense. In the United States as well, we created a Highway Trust Fund, back, I guess, in the 1950s, when we were going to build the interstate highway system, which levied taxes on gasoline that were committed to federally funded roads. So for Japan to have a similar system is not unique.
The problem that economists have with systems like this is that there is not necessarily any correlation between the amount of taxes raised and the real need for constructing or maintaining roads. One guesses that’s exactly what’s going on in Japan. This has been a huge slush fund. And they’ve been building roads all over the country that they don’t need. To put it bluntly. And perhaps not building roads in places where they are needed. So, having a discussion about having these revenues go into the general government fund, rather than to remain earmarked for roads is quite a significant thing.
All the more significant if you add to this that, I believe, that to a far greater extent than in the United States, the Japanese have used road-building for political purposes. This is the bacon that politicians can bring home to their districts. They make some of our more venal politicians look like a bunch of kindergarteners. So, it’s probably a good thing to take away that money that’s being automatically allocated for road building in general.
RCA: If it can be done.
EL: Yes, if it can be done.
RCA: You’ve mentioned over the years similar arrangements in railroads. Are there any comparisons there?
EL: Yes, back before roads got to be the big slush fund … Which again, I don’t know that much about the history of this. But I assume it dates back to the late fifties or early sixties when Japan decided that it needed to have, sort of in imitation of the U.S., a modern highway or expressway system, and rushed to get it all done, or large parts of it done in time for the Tokyo Olympics in 1964. But that’s probably when politicians discovered they had a wonderful new source of money to bring home to their construction companies.
Prior to that, it was the railroads. So, from the beginning of the twentieth century, when most of the railroads in Japan were nationalized to create Kokutetsu, the National Railway, up through the 1960s, that was the big pot of money that politicians wanted to use. And that’s why, in part, Japan actually continued to build or expand rail lines in very rural parts of the country until relatively recently. Where there’s absolutely no chance that the revenues from passengers would ever pay for the cost of building these things. That went on through the 1960s, and even into the 1970s, the railroads still were battling to get out from under the pressure to build these lines.
RCA: Certainly we have seen, what we might call political distortions in the building of roads as well.
EL: Absolutely. I’ve driven on some of these things. I remember ten years ago being in Shikoku. We were driving through the mountains. There was a highway, an expressway, on the map. We got on it. Lo and behold, it was a two-lane expressway. One lane each direction. Limited access. It was a toll road. The tolls were just as high as anywhere else in Japan. But heaven help you if you get stuck behind a dump truck. Because you have only one lane. And there’s a divider. So you can’t even do a passing operation. Luckily, one doesn’t get stuck behind dump trucks very often because virtually no one was driving on this road. Most of the time there wasn’t a single vehicle in sight in front of us, and not a single vehicle in sight behind us.
RCA: So, you think this might have been more of a political than economic road.
EL: More political than economic, yes.
RCA: Now, those of us who don’t know much about economics often talk in quite general terms about whether the Japanese economy is getting better or getting worse. And I know that chills you professionals. But, what do you think about the medium- and near-term future of Japan’s economy. Is it as optimistic as many people describe it today?
EL: I’ll give you an economist’s answer. “On the one hand, and on the other hand.” We’ll start with the positive news. If you take a longer-term view: where Japan is going in the next ten years, versus where it’s been during the past ten years, they’re in pretty good shape. There were several big things that needed to be fixed, as of the mid-1990s. Corporations discovered they had too many workers, too many facilities, and too much debt.
The private sector now has fixed that problem. They’ve worked down their employment levels. And now employment is beginning to go back up again. They’ve sold off pieces of their companies, aided by some changes in the corporate law. And they’ve worked down their debt level. So that puts the corporate sector in a much better position to do the things we want the corporate sector to do.
Meanwhile, the banking sector had a huge pile of non-performing loans. They’ve worked that down to a level where it’s no longer a potential crisis for the economy. And finally, the economy was experiencing deflation. The first industrial country to experience this since the 1930s. That has, more or less, come to an end. Prices aren’t going up much anymore. But neither are they going down. They’re just about at zero. So, those big problems have been fixed. And that’s good for the economy, looking out for the next decade or so.
But, looking at the shorter run, I discovered on a trip to Japan a month ago that many of the people, both Japanese and foreigners, who analyze the economy, were not all that optimistic about what’s going to happen over the next year or two. In part, this is a natural thing. The economy has been on the upswing since early 2002, when it bottomed out.
As I’m sure many of your listeners know, the Japanese government has been touting the fact that this is actually the longest expansionary phase since the end of World War Two. Of course, it’s also been the lowest growth expansion since World War Two. But nevertheless, the economy has been growing. And it’s just natural that after a period of time the business cycle kicks in and growth slows down again. And we may be at that point.
I would add that economists are further concerned that although the economy has been growing, household income hasn’t been going up all that much. And, in the long run, what drives the economy is household spending for final goods and services. And that isn’t all that strong. Or, it’s not buttressed by as much increase in household income as one would like it to be. For a robust period of growth.
I’m also a little concerned that this recovery has been dependent to a pretty large extent on capital expenditures by companies. They thought they had too many facilities ten years ago. They worked that down. Now the story is their facilities are obsolete, and they need a round of investment to bring them back up to date again. There’s probably a fair amount of truth to that.
But I get worried when I see an economy spending as much as Japan does on capital expenditure to produce low growth rates. In Japan fifteen to sixteen percent of GDP is going into capital expenditure. In the United States, we spend ten to eleven percent. This may not be sustainable. Once again they may discover that they have excess facilities, and that will help slow them down, possibly, over the next year. In the medium term I’m more optimistic. Because the big problems they had over the past decade, if they haven’t gone away, at least they are in better shape. In the short run, over the next year or two, I think they are going to slow down. I think they’re going to slow down substantially. They could, actually, unfortunately, even slip back into deflation if they’re not careful.
RCA: That’s a valuable assessment, since it’s informed and also not simply an echo of everything else we hear. What other comments might you have that I haven’t thought to ask you, that our listeners might be interested in?
EL: We’ve covered most things. But let me tell you one other thing I heard while in Tokyo. As you know, one of the themes over the last seven or eight years in Japan, has been to encourage foreign corporate participation in the Japanese economy. After more than one hundred years of believing that Japan should be owned and operated by Japanese, in the late 1990s you got this new message that, like most other parts of the world, the Japanese government had figured out that foreign investment in Japan is good. It brings in money. It brings in technology. It may bring in managerial skills. Things that might be good for Japan. Particularly given the problems Japan was facing at the time.
Similarly, in the financial sector, foreign financial firms are very skilled at a lot of things that Japanese firms are not. Restructuring companies, for example. Various other kinds of things to rescue companies that aren’t doing well. So, the attitude appeared to have shifted. I get the sense that that’s fading again. In a number of ways.
For example, as part of the late nineties, the Japanese government was talking about expanding the financial sector in Tokyo. To make Tokyo an equal to London and New York. And, of course, to do that, you have to be open to heavy participation by international financial institutions, European and American. That sense is fading. More recently, officials apparently have been saying, “Well, gee, we can’t really compete with London and New York. Maybe not even with Hong Kong. But that’s okay. We don’t need to be a global financial center. As long as we finance the Japanese economy, that’s really all that counts.” And that’s distressing to members of the financial sector. Or, at least, to the foreign financial firms that are in Tokyo.
And you also see it in more reluctance to continue down this road of being wide open, or more open, to foreign direct investment in Japan. In fact, while I was there, there was this emerging debate over so-called triangular acquisitions that would enable foreign firms to acquire Japanese firms. So-called stock swaps rather than outright cash purchases. Made triangular because you have to use a domestic subsidiary in Japan to route this all through. Keidanren came out as being opposed to this.
Now, it may be that the government will, in fact, approve this maneuver. But it’s interesting that there’s been a very active debate and voices like Keidanren raised in opposition to it. I fear maybe that the mood is one that “Well, in the 1990s, we were in big trouble. We needed foreigners like Carlos Ghosn to rescue Nissan. But we’ve done that now. So, just go home.” There’s a little apprehension in the foreign community in Tokyo that that may be the direction in which Japan is drifting.
RCA: That’s interesting too. In conclusion, I wonder if you could tell us a little more about your new organization and its activities and plans for the future.
EL: Well, it’s not a new organization, actually. It goes back to 1984. But it was a relatively invisible organization. It did a lot of things. But I guess the Americans working on Japan didn’t know much about it. My predecessor tended to work more with the Japanese academic community. So it may actually be better known in Japan than in New York.
But, what the Center does is to help sponsor research by NYU faculty, and outside faculty. And put on public programs for both our faculty and students, and members of the public, on various different issues about Japan. Now, I’m actually attempting to expand the scope of the Center. The Stern School of Business does not have other geographically-based centers, like this one. And, let’s face it. Japan is not as exciting to people in the United States as it was fifteen years ago. Perhaps other parts of Asia, including China, have become more exciting. Plus, certainly, American and Japanese have a great interest in what goes on in the rest of Asia. So I’m trying to expand the programming to include more that deals with the rest of Asia as well. That’s one of my goals.
I have re-vamped the Website, by the way. In addition to information on the programming which the Center does, I’ve included a section that assists people looking for information on economic Japan. So, if any of your listeners are trying to figure out where they go to find economic data, for example, I’ve attempted to put together a convenient collection of links to various Japanese government and other websites that provide that data.
RCA: That’s very useful. What’s the web address?
EL: I knew you would ask. It is http://w4.stern.nyu.edu/japancenter.
RCA: I’ll put a link to the website in the show notes and the transcript as well.
EL: Thank you very much.
RCA: Well, thank you, Ed. I know you’re busy, and I know this eats time from your schedule. So, I appreciate your comments.
Well, there you have it. We’re way over time this week. But I’m sure all of you will agree that it was time well spent. Thanks again to Dr. Edward Lincoln, the new director of the NYU Stern School’s Center for Japan-U.S. Business and Economic Studies in New York.
With no bluegrass clip for you again, I’ve got to say, goodbye all. Until next week.
