August 8, 2008; Volume 04, Number 24

of the

Japan Considered Podcast

[Listen to the audio file by clicking here]

Clink Links Below for Today's Topics

Introduction
Dr. Edward Lincoln on the Economic Implications of the Cabinet Reshuffle
Toshimitsu Motegi the New Cabinet Line-Up’s Only Surprise
Ascent of the Ministry of Finance Old Boys, Led by Finance Minister Bunmei Ibuki
Eagerness to Raise the Consumption Tax Rate
Resurgence of the Career Bureaucrats?
Is All of This Necessary?
Would a Taro Aso Cabinet Make Any Difference?
Concluding Comments

Good Morning! From Beautiful Spring Valley. In the Midlands of South Carolina. Today is Friday, August 8th, 2008. And you are listening to Volume 04, Number 24, of the Japan Considered Podcast.

Introduction

Ah, good to be back behind the microphone after such a long absence. Thanks for dropping by. No, I haven’t “pod-faded,” as the saying goes. Or disappeared into the Wilderness. Just back from a long camping and kayaking trip. It was a great time. I’ll put a link in the program transcript to a few web pages with photos for those of you interested. RV camping with the Mobile Studio in Virginia, West Virginia, Pennsylvania, and New York State. Or, just go to the main page of the Japan Considered Project website, at www.JapanConsidered.com, and click on the new “Mobile Studio Travels” link. Pages for five of the seven parks and campgrounds are done. With two more to go. So, have a look!

As I mentioned on the last program, way back on July 14th, good internet access seems to be inversely proportional to the beauty of the surrounding scenery. And I visited some beautiful spots! At three or four of them, even cell phones didn’t work. And I thought that was unusual these days. So, no news from Japan for days – weeks! – at a time. Thank heaven it was during the summer. When the flow of political and international news from Japan slows down just a little.

This week again we have a good bit to cover. But much of it will just have to wait one more week. Because Dr. Ed Lincoln of NYU’s Stern School agreed to a SkypePhone interview on the economic implications of the recent cabinet reshuffle. Ed has interesting things to say. And it seems a shame to edit anything out. So we’ll have the whole interview.

More next week on some unusual developments in Japan’s relations with Mainland China and Korea.

Dr. Edward Lincoln on the Economic Implications of the Cabinet Reshuffle

So, let’s get right to it here …

RCA: Good Morning, Ed. Bob Angel.

EL: Good Morning, Bob.

RCA: I wonder if, today, you could help us out on the Japan Considered Podcast with your thoughts on the economic implications of this cabinet reshuffle that Prime Minister Fukuda announced at the beginning of the month.

EL: Sure.

Toshimitsu Motegi the New Cabinet Line-Up’s Only Surprise

RCA: Do you see any surprises in the names of the cabinet members?

EL: There was only one name that surprised me. I guess in part because it’s a politician I hadn’t known, or paid any attention to. The appointment of Mr. Motegi to be the head of the Financial Services Agency. That was an appointment that pleased me. He’s relatively young; he’s relatively new to politics. Prior to that he’s been in the private sector at McKenzie, Marubeni, even as a reporter for a while. And this continues a tradition that began with the appointment of Takenaka to head FSA. To have younger bright people, who probably actually know what they’re talking about, and can push the banks around.

As you may remember, the first couple of years that FSA was in existence, they had had Party hacks run it. And it was totally ineffective. But after Takenaka got there, it changed. And the people after him seem to have kept that up. So I’m glad to see that particular appointment. The rest of it was pretty unsurprising.

Ascent of the Ministry of Finance Old Boys, Led by Finance Minister Bunmei Ibuki

RCA: What about the appointment of the Finance Minister, Mr. Ibuki?

EL: Well …. That was not surprising. But disappointing to me. Because he’s an Old Boy, former Ministry of Finance bureaucrat. Now, there have been many Finance Ministers over the years who’ve been former Finance Ministry bureaucrats.

But the problem with this is that for the last ten to fifteen years, I guess, there’s been all the talk in Japan about structural political change. In the direction of the politicians taking on more power, and taking it away from the bureaucrats. Certainly the Ministry of Finance has been a main part of that. They were dismembered in 1998. The FSA took off their bank supervision function. And a little bit later the new economic and fiscal policy ministerial post took away their overall budget policy from them.

But here we have another OB coming in to be the minister. The problem with that is that he’ll just be very sympathetic to whatever it is that the younger bureaucrats running the place now want to do. And in my view, he’s not going to exercise this sort of new political leadership over the Ministry.

RCA: What is it that the current Ministry of Finance bureaucrats want to do?

EL: In general you can describe the Ministry of Finance as being opposed to large budget deficits. They’ve been on that theme now for ten years. More than ten years, I guess. One assumes they’re still on it. And that means they want to hold down spending, and they would be in favor of increasing taxes. In particular, the consumption tax. And that, by the way, Mr. Ibuki, the new Finance Minister, is a position he’s identified with.

Eagerness to Raise the Consumption Tax Rate

RCA: How about Mr. Yosano?

EL: He also is associated with raising the consumption tax.

RCA: He’s given a lot of credit in the Japanese political press, or at least that part I’ve read … By giving credit, I mean they say he’s going to be very influential. Do you think so?

EL: Mr. Yosano does seem to get a fair amount of exposure in the press. And if that is an indicator of being involved and effective more than other politicians, maybe the press is right. But I’ll leave that up to political scientists, like you.

The more serious question I have is whether it is economically and politically advisable to be pushing the rise in the consumption tax at the present time, which is the policy he is associated with.

RCA: And also nearly everyone else in this cabinet, according to what I’ve read.

EL: Well, yes. That does seem to have been a criterion for picking people. Particularly for these economic posts. Even the Agriculture Minister! Apparently his main contribution to the cabinet … Or, the reason for putting him in the Cabinet is that he favors a rise in the consumption tax. Which has nothing to do with agriculture, but …

RCA: You know, as a political – I’m not a political scientist, but I am a student of politics. And as such, it seems odd to me that a political party facing an election in the next few months would insist on talking about a dramatic increase in the tax burden on its voting population.

EL: I agree with you. It seems rather bizarre to me that at this moment in time they would move forward with this. You’d think they would wait until after the Lower House elections. Then there’s the potential of four more years before they have to have another one. Unless something else happens.

RCA: Is it possible this is the result of pressure from the Finance Ministry that we were talking about a moment ago?

EL: It could be. But I think there have been factions within the LDP that have been in favor of doing this anyway. So it’s probably some combination of the two.

You know, I can imagine a politician like Fukuda perhaps believing that pushing through the rise in the consumption tax would be a demonstration of his leadership. Particularly if he were able to convince the public that it actually needs to be done. Personally, I don’t think he can do that. I don’t think the public’s going to buy it. But I can imagine a politician thinking that.

RCA: Well, they’re certainly trying, aren’t they. Talking about rising social welfare expenditures, and aging population …

EL: Right

RCA: Well, okay, going out on a limb here. Let’s say that the Fukuda Cabinet decided at some point to raise the consumption tax rate. What kind of an economic effect would that have on Japan?

EL: Well. That’s a good question. When the consumption tax was first introduced in whenever that was, it had very little effect. Of course, though, the tax went from zero to three percent. Japan was in the middle of an enormous economic boom at that time. And apparently households just kind of brushed it off, and were not bothered by it.

But, when it went from three percent to five percent in 1997, it pushed the economy into recession. In fact, it had an even worse impact. Because it falsely led many people in the summer, fall, and winter of 1996 to think that the economy was on an upswing. Because, in particular, housing construction and household consumption spending was going up fairly rapidly. Well, it turned out that what was going on was that households were behaving exactly as economists expect them to. They were aware of the fact that the consumption tax would start by the following April. So they went out and got construction work done on their house. Put that addition on, or refurbished a room. And, buy a car, and those other nice things, before the tax went up. So, when the tax went up there was a big drop in consumer spending and housing construction. And it actually pushed the economy right into recession in the second half of 1997.

I’m inclined to think that we’re more likely to get that 1997 experience than that 1988 experience. The economy’s doing okay. But consumer spending has been growing pretty slowly. Incomes are not going up. And the mood of the public, I think, still remains somewhat sour at the present time. And I think they would react negatively to having this tax increased.

RCA: It seems obvious that populations in democratic countries are adverse to tax increases. Yet, here we have a cabinet that looks as if it were created to implement such a policy.

EL: To push it through! Yeah, I know. The timing is just odd to me.

Resurgence of the Career Bureaucrats?

RCA: I’m just baffled, Ed, about the whole thing.

This is a strange question. But are we seeing something new here? Or are we going back to old patterns that you and I grew up with in the Cold War era? What do you think?

EL: Old patterns in terms of what?

RCA: Economic policy.

EL: Economic policy being driven in directions the public wouldn’t like. But the politicians passing it off as something that can’t be helped; it needs to be done?

RCA: Exactly. Taking their marching orders from the bureaucrats.

EL: From the bureaucrats. Well, that’s certainly possible. It’s difficult to say that any of the people in this particular cabinet, with the possible exception of Mr. Motegi, are the kind of people I would expect to stand up to the bureaucrats, and say, “Nope. These are political decisions. This is democracy. And my voters don’t want this.” It’s a lot easier to see this crowd as people who will listen to the bright bureaucrats and say, “Oh, I guess we’d better do that.”

RCA: Increasingly, I’m reading and hearing criticism of the Koizumi reforms as destructive of traditional Japanese patterns, economic patterns, and the need to correct them. That’s kind of interesting to me.

EL: That’s interesting. I guess my view of that is that it’s somewhat unlikely that those reforms will be unraveled. But the pace at which further changes will occur is likely to slow down, or stop.

In my experience, when I’ve seen deregulation, or privatization, or whatever it is, that there will be a counter-reaction afterwards that does not undo the decision but stops new things in that direction from happening for a while. And it may be that we’re back in a period like that.  

RCA: That’s interesting analysis. That makes very good sense to me.

Is All of This Necessary?

Well, are there any other economic policy formulation or implementation implications of this cabinet that you think we should be talking about on the program?

EL: Well, there is one thing I’d like to bring up. And that relates to discussion of the consumption tax, and the odd timing of this. Now, any economist will tell you that in the long run, say over the next 50 years, Japan needs to go through a period of fiscal consolidation during which it actually has a government surplus at some point. And that as the population ages it gets a little more difficult to do that, because expenditures go up and tax revenues might go down.

But, be suspicious when people tell you, “Oh dear. Japan’s got a huge budget deficit and a huge amount of outstanding debt, and all this wasteful expenditure. And, boy, Fukuda’s got to take an axe to that.”

The problem with that description is that it describes Japan of five or six years ago. In fact, public works spending has been declining since 1997. It started under Prime Minister Hashimoto. And has been continuing basically ever since. Japan now spends roughly the same amount of GDP on public works as we do. A little bit more. We’re at three percent. They’re at four percent. European countries are in the three to five percent range. So Japan doesn’t look strange anymore, in terms of huge amounts of public works spending.

Similarly, on the government deficit. It reached a peak of seven percent four or five years ago, when Japan was in recession. But, with the renewal of economic growth in 2002 tax revenues have been accelerating. And today Japan has a government deficit of only 1.5 percent of GDP. This is not a big deficit.

And partly because they’ve gotten the deficit down, and deflation has been slowly coming to an end, the actual ratio of outstanding debt to GDP isn’t going up any more. Yeah, it’s 180 percent of GDP, but it’s been flat for the past couple of years.

So, as an economist, I would say Fukuda’s not really under pressure to follow a policy of fiscal retrenchment at the moment. Which makes it all the stranger that they seem to be on this hobby horse of raising the consumption tax.

RCA: That’s a very useful perspective on all of this. But it makes me even more confused about why in the world they’re doing it now. It’s a little like this eruption of the bilateral dispute with South Korea over those rocks!

EL: A little bit like that. But my guess is that both of have seen this kind of things many times before.

RCA: I remember the political battle over the creation of the consumption tax, and the Ministry of Finance finally forcing the incumbent prime minister to accept it. To his political detriment.

EL: And that is a process that took twelve years. And what you had going on was development of a position at the Ministry of Finance. “We must have a consumption tax.” And then the determined effort to sell it for a long time. And then getting enough politicians, including the prime minister, on board. And everyone starts singing the same mantra, so to speak.

And something of that sort seems to be going on now, given the number of people who want to raise the consumption tax in this cabinet. Objective analysis kind of gets shoved off to the side. And the slogan becomes “Gotta raise the consumption tax because of aging population and huge government deficits,” and whatever else it is. That doesn’t necessarily stand up to analysis.

I’m sure you’ve had these same kinds of conversations occasionally with Japanese bureaucrats and politicians. Where what they’re telling you sounds like utter nonsense. But when you try to challenge them, you can’t get them off their position because that’s the position. And it stays that way for some time.

RCA: Right. That may be what we’re seeing now.

Would a Taro Aso Cabinet Make Any Difference?

What if it’s true that the rumors we’ve been hearing that Prime Minister Fukuda made a deal with Taro Aso to pass off the premiership on him before the next election. Would that affect anything economically?

EL: Hmmm. Probably not. I wouldn’t think it would make that much difference. Granted, if Aso came in and had a new cabinet with a bunch of new faces …. But it’s just going to be pretty much a reshuffling of the same faces, I would think. Possibly, if there were a reshuffling, maybe the people who want to raise the consumption tax would go out. And, frankly, I don’t know where Aso stands on that issue.

It’s also possible there’s a deal of a different sort. Maybe Fukuda has agreed that he’ll be the one to get the consumption tax through, and then take the heat afterwards, when people are unhappy with it. And that clears the decks for Aso, or whoever it is who will follow him at that point.

RCA: Well, the Liberal Democratic Party will be very lucky to come out of this with their …

EL: Able to name a prime minister at all?

RCA: Yeah, with their majority intact. Yeah. The one thing we haven’t heard about, or at least I haven’t. I’ve been away for nearly a month. But we’ve heard very little about the political or electoral plans of the political reformers in Japan. And with over 40 percent of Japan’s population responding to opinion polls saying they support no party in particular, it’s certainly possible that something new might erupt. Even before the next general election. But most people don’t think that’s a possibility. But we’ll have to see.

EL: I’ll leave that one up to you. But I think we’ve had a conversation before and agreed that certainly the LDP has no incentive to hold this election any earlier than they absolutely have to. So you would think that that fear of knowing what is likely to happen in this next election would keep some kind of a big shake-up happening between now and next September. Unless you’re talking about a repeat of 1993, in which a whole group of LDP politicians just walked out of the Party.

RCA: That’s one possibility. Certainly one. And there are disaffected members of the LDP. There are disaffected members of the DPJ. And then there are some local, or prefectural or local, politicians, who aren’t at the moment involved, but may well be. So, I’ve been preaching this for a long time.

Well, thank you, Ed, for your time. I really appreciate it. I know you’re busy as the dickens there with your Institute and your programs. It’s very decent of you to come on, to take the time to help us out with these economic policy issues.

EL: Always glad to be of service to you.

RCA: And you certainly have been.

Concluding Comments

Well, there you have it. We’re approaching our time limit now. But I hope you’ll agree that devoting the program today to Ed Lincoln’s comments was well worth the time. He’s one of the very few practicing economists with a keen understanding of politics. And that’s essential. I always learn something new while talking with him.

Next week we’ll consider the current state of relations between Japan and Mainland China. With focus on surprising developments in the poisoned gyoza issue. This, I think, is more than just titillating gossip. It may help us to understand how Japan’s conduct of international relations is changing. We’ll also look briefly at the North Korean situation. No surprising developments there. But that alone may be of interest to us.

Please continue to send your comments and suggestions for the program to me at RobertCAngel@gmail.com. They’re most helpful. And thanks to those of you who wrote during late July asking when I’d be back. Without an audience there’s little reason to produce these programs.

So, goodbye all. Until next week.