January 23, 2009; Volume 05, Number 04

of the

Japan Considered Podcast

[Listen to the audio file by clicking here]

Clink Links Below for Today's Topics

Introduction
Dr. Edward J. Lincoln via SkypePhone on Tuesday, January 20, 2009
How will the Obama Administration’s Arrival Affect Relations with Japan?
Will this Democratic Administration Be More Protectionist than Its Republican Predecessor

International Trade Agreements Limit the Protectionist Options of Any Administration

Who Is Likely to Be Responsible for Economic Relations With Japan in the Obama Administration?
Availability of Accurate, Current Information About Japan for U.S. Government Officials
Obama Administration Coordination of Inter-Agency Conflicts Concerning Economic Relations With Japan
Turning to Japan’s Down-Turning Economy and Politics
The Economics of Prime Minister Aso’s 12,000 Grant Program
Mention of a Consumption Tax Increase in FY2011 in the Next Budget Draft
Concluding Comments

Good Morning! From Beautiful Hunting Island State Park. Right on the Atlantic Coast of South Carolina. Today is Friday, January 23rd, 2009. And you are listening to Volume 05, Number 04, of the Japan Considered Podcast.

Introduction

Yes, in the Mobile Studio again. And again, parked right on the shore of the Atlantic Ocean. At another of South Carolina’s remarkable state parks. A very different environment from Edisto Beach, just north of here. That has to be seen to be believed. I’ll try to add some photos to the transcript of this program. But may not be able to. Since the full production process this week is being done from the Mobile Studio. We’ll see.

On Tuesday, I was able to interview Dr. Ed Lincoln, director of the Japan-U.S. Center at New York University’s Stern School of Business, via SkypePhone. I asked Ed to explain how the change of presidential administration in Washington is likely to affect bilateral U.S.-Japan economic relations. Since he’s far closer to this new administration than am I. His comments were so interesting I’ve decided to run the whole interview this week. So, once again, we’ll have to put off examination of Japan’s domestic political scene. Hopefully we’ll get to that next week.

Dr. Edward J. Lincoln via SkypePhone on Tuesday, January 20, 2009

RCA: On the last program we were able to persuade Mr. Gregg Rubinstein of Washington, D.C. to provide us with some analysis of Japan-U.S. security relations. This week, let’s try to give Dr. Ed Lincoln at the New York University Stern School of Business a call. And ask him to provide us with similar analysis on the economic side.

[phone ringing]

El: Hello.

RCA: Ed, this is Bob Angel in Columbia, South Carolina.

El: Hello, Bob. Good to talk with you again.

RCA: Thanks for taking the call. And I hope you can talk with us for a while today about the economic aspects of the U.S.-Japan relationship. And especially about the changes that we may, or may not, see under the incoming Administration.

How will the Obama Administration’s Arrival Affect Relations with Japan?

First, just in general, do you think we’ll see any significant changes in the way the United States manages economic relations with Japan under the newly inaugurated Obama Administration?

El: Actually, I don’t. I think there’ll be very few changes at all. Partly because we have not had big issues on the economic side between the two countries. Therefore, many of the issues have been handled at the working level. That is likely to continue. I don’t see big contentious issues on the horizon about which Democrats and Republicans would react differently. So, I don’t think we’re likely to see much of any change on the economic side.

Will this Democratic Administration Be More Protectionist than Its Republican Predecessor

RCA: Many people in Japan – you’re reading the same stuff I do – many people in Japan are worried about this new Democratic administration coming in, suggesting that Democratic administrations tend to be more protectionist than Republican administrations. Do you think that’s a fair assessment?

El: To use a colloquial expression, that is utter “hogwash.” In reality, Democratic administrations and Republican administrations in their relationship with Japan are about the same. And you cannot say that Republicans are free trade and Democrats are protectionist. Who was it who restricted automobile sales by Japanese auto companies in the United States? Ronald Reagan! That’s probably the most protectionist action any president has taken against Japan in the past 35-40 years.

On the other hand, what did President Clinton do? Virtually nothing. He threatened one protectionist action, also on automobiles. As a tactical negotiating tool in June of 1995, to get the Japanese to move forward on an agreement to make the Japanese auto market more open. And withdrew that threatened action as soon as there was an agreement.

So, in reality, I see very little difference. Republicans talk free trade but don’t necessarily practice it. Democrats may sound more protectionist but don’t necessarily practice it.

RCA: So, again, you see very little chance, even given the basic differences in constituencies of the two parties, for …

EL: Very little

RCA: For this to affect economic relations with Japan

International Trade Agreements Limit the Protectionist Options of Any Administration

EL: Absolutely. Think about it this way. The Japanese are genuinely concerned about this administration being more protectionist. Well, how does one behave in a protectionist way. The easiest way is to raise tariffs. We can’t do that! Our tariff levels are bound by international agreements. So we cannot, willy-nilly, say “oh, we’re worried about this industry or that industry. Let’s push up the tariff.” We can’t do it!

How about quotas? Well, quotas per se, have been illegal under the WTO. Actually, since the inception of the GATT, and have continued under the WTO. So it’s not possible to impose new quotas where ones did not exist before. We used to get around that with a rather hypocritical measure called ‘voluntary export restraints,’ with which we brow-beat the Japanese into imposing a quota on their exports to the U.S. But we can’t do that either. Because we agreed in 1995 with the creation of the WTO that this kind of action now would be WTO-illegal. So, the measures that a government can use to behave in a more protectionist way, simply are not available to any administration.

RCA: Then why are the Japanese so worried about it?

EL: Partly because the people who are worried actually don’t know very much about trade policies. I’ve been surprised when I tell people we can’t do VERs voluntary export restraints, we can’t raise tariffs. And the response is “Oh, really? I didn’t know that.” So I think it’s a fair amount of ignorance or misinformation about how trade policy work at this point in time.

Second, I think it’s just a general sense that even if it’s not tariffs, quotas, or VERs, somehow the Administration will manage to do something. Because they have to be nice to the labor unions. And we all know that labor unions generally support Democratic candidates. But the fact that they supported the President’s candidacy. And the President from time to time uttered some rather carefully and ambiguously worded statements of support of labor union issues. This doesn’t necessarily mean he will follow through. Particularly on the trade side of this.

The only way you can project these Japanese concerns into something that might happen …. Well, you could argue that anything that supports the Big Three auto companies is indirectly protectionist. Because we’re helping them versus the rest of the auto companies in the world. Subsidized loans, for example, could be construed by the Japanese as vaguely protectionist. But personally, I think that’s a bit of a stretch.

RCA: Also, it’s nowhere near the treat to Japan’s interests in the bilateral relationship that protectionist action on the part of the U.S. in an earlier era would have been.

EL: Exactly. This is nothing like the earlier era of, say, the beginning of the 1980s. When there was a lot of agitation by the Big Three to do something. And we did! We did impose voluntary export restraints on Japanese automobiles that had a binding impact on the sale of Japanese cars in the U.S. for roughly four or five years.

RCA: And raised prices.

EL: Raised prices. As I know well. I was forced into paying a $2,500 premium over sticker price for a Japanese vehicle I bought in 1984.

RCA: I’m always very reluctant to agree with any of your policy views. But you make a most persuasive argument on this one. It’s something that people on both sides of the pond should pay more attention to.

EL: I think they should. Particularly on the Japanese side of the pond. Because the one fear I have – and we can talk more about this later – having this apprehension about what the Obama Administration might do on trade policy, sets up the Japanese to walk into their relationship with the a new set of individuals running policy in the U.S. Government with a bit of a chip on their shoulder. And that’s probably not good.

RCA: That is a good point. You don’t hunt quail with “00” buckshot.

EL: I guess. I’m not a hunter. So I wouldn’t know.

Who Is Likely to Be Responsible for Economic Relations With Japan in the Obama Administration?

RCA: I didn’t think you were … Speaking of management of the relationship with Japan under the new Administration, I don’t really have many contacts with those people. Whereas you have many contacts with them. Who’s going to be responsible for management of economic relations with Japan?

EL: We don’t know. To begin with, to repeat something that I think Skipp Orr said on this program, this is a huge relationship we have with Japan. And the notion that there can be one or two people who “handle” the relationship is getting a little out-dated. That said, certainly we all know that the Japanese government tends to feel more comfortable when they can identify individuals in any Administration that they know, they’ve worked with before, or they feel they know something about Japan.

The Obama Administration already has some people like that lined up, who may end up being relatively important in relations with Japan.

RCA: Are you willing to name any of them?

EL: Sure. Incoming Secretary of Treasury, Tim Geithner. He served for several years as the Treasury attaché in Tokyo in the late 1980s. And then during the 1990s, when he was at Treasury back in Washington, one of the things he was responsible for was following Japan.

The same could be said of Larry Summers. Not a Japan expert. But he knows people in Japan. He worried a great deal during his years in the Clinton Administration about the economic problems in Japan. He has, from time to time, as I know from personal experience, been interested with, and discussed with people, Japan since he’s been out of government. So he brings some background and knowledge of Japan.

We are likely to see Matt Goodman going back into government. Matt was the Treasury attaché when I was working at the American Embassy in Tokyo. And has continued to follow Japan off and on. He spent about a year and a half in the Bush Administration at the National Security Council working on Asia issues. He probably will come into this Administration in some Asia-related position. So there you have at least three people who have a background on Japan on the economic side who will be in this Administration.

Availability of Accurate, Current Information About Japan for U.S. Government Officials

RCA: Years ago when you and I were together in Washington there was a realistic concern about having people who actually understood what was going on in Japan. Information from Japan was very limited at that time. That seems to have changed. I’m not in Washington any more. But you’re close to those things. How do you see that?

EL: Yes and no. Certainly the level of ignorance or lack of experience and exposure to Japan that we saw back in the 1970s is over and gone. There’s a vastly larger number of people who’ve had at least some casual experience with Japan. They’ve been there. They’ve met Japanese. They’ve had to deal with Japanese, say in former government positions or in the private sector. So there are a lot more people around who know something about Japan.

On the other hand, one can be somewhat concerned that the level of news available to the casual policy-directed person in Washington probably is less today than it was twenty years ago. The Washington Post, for example, no longer has a Tokyo-based economic correspondent. That position has been moved to Hong Kong. And the person’s responsible for all of Northeast Asia.

You’ve probably heard it on NPR. You hear a story about Japan. And, lo and behold, the reporter is reporting from Hong Kong or Beijing.

RCA: I’ve noticed that in most of the mainstream media – the Post, and the Times, and the LA Times, and others – there seems to be a heavier percentage of social issues, and cultural issues. Nothing wrong with that, of course. You don’t have to have the language or contacts to do them. You just take a few tours …

EL: Everyday things that you see in the street that impress you as interesting or exotic, or whatever.

RCA: Mixed bathing; strange practices …

EL: Men and women not holding hands in public.

RCA: I thought I was getting too cynical about the U.S. press. But judging from what you say, though, it is a problem.

EL: It may be a problem. Part of the answer to this is that there isn’t a lot of interesting economic news to report. From the 1950s through the 1980s the story about Japan was very rapid economic growth and development. The success of Japanese companies in international competition. In the 1990s the story was the incredible imploding Japanese economy. They had problems here; they had problems there. The banks were collapsing. And that attracted some attention for a while.

What is there to write about on the economic side today? Economically, Japan is kind of a normal country. We don’t see lots of stories about the German economy, or the French economy. Because there isn’t much that attracts excitement. From time to time there are stories like that. And certainly the business newspapers. Particularly the Financial Times, and somewhat less so, the Wall Journal, we have so many more American investors who invest in Japanese assets that they run stories about individual companies, or what’s happening in the stock market. But for a general paper like the Post or the Times, there isn’t a lot to write about economically. And that’s not going to change a whole lot.

RCA: That’s not altogether a bad thing.

EL: That is correct. The only down side, as you pointed out, if you do want people in government who have a general knowledge of what’s happening. And if their main source of input is the New York Times or Washington Post, there’s not as much being written.

RCA: Sorry to interrupt. But that another thing I wanted to ask you about. The quality of information available inside the government. I’ve never been in government. So I don’t know about that. But has that improved from what it was during the 1980s, or 1970s?

EL: Hard to say. I think it probably has. If we confine this to Japan, certainly there is available to people in government, and has been for many years, daily translations of stories about Japan. And I think Japan also crops up in some of the broader clipping things that are available on everybody’s desk when they get to work in the morning. But certainly on Japan, it’s there. I think the translations of Japan stories has improved over the past twenty years. Partly because of a personnel change that took place a little less than twenty years ago? In the early 1990s. The person running the translation service in the American Embassy.

RCA: But also there must have to be reams of additional background information that’s prepared, or isn’t prepared, prior to negotiations, and things of that sort.

EL: Yes. That’s true. Certainly anyone who sits down today to put together background material is going to have a much higher volume of material available from which to pick. Even if the New York Times isn’t writing stories, the Financial Times is. And other publications. The Economist, for example, does a fairly good job of covering things in Japan. Plus basic translation services on a daily basis, both out of the American Embassy and out of the CIA. There’s just a lot of material there.

And, let’s face it. There’s a lot more official material from Japan available in English on line from the Japanese government. It’s incredible. You and I can remember the days when if you were doing research on Japan and needed a report from a Shingikai, one of the advisory groups of the Japanese government, and you were not physically present in Tokyo to show up at the government office that issued it on the day it was released, you probably never would see it. Because they would print 100 copies, and they would be gone in thirty minutes. And then you were stuck. Now, they’re all available on line. At least in Japanese.

RCA: And many in English.

El: And many in English these days.

RCA: So the notion that the U.S. government has to have these Japan specialists who speak and read Japanese so the American government won’t do silly things because they don’t understand what’s going on in Japan really isn’t all that valid anymore.

EL: Not as valid as it used to be. That is correct. Yes.

Obama Administration Coordination of Inter-Agency Conflicts Concerning Economic Relations With Japan

RCA: That is encouraging. Another point, and I don’t know how much you want to get into this. But it is going to be important. Will this new Administration coming in, has come in, have difficulties in inter-departmental or inter-agency coordination of foreign policies? Especially related to Japan? How do you think they’ll handle that sort of thing?

EL: We don’t know. I think that’s a big unknown. On the one hand we do know that this is a President who has felt comfortable picking rather strong personalities to run different departments. On the other hand, this is a President who also seems to feel that he is going to be good at keeping them under control. Whether this is all true or not, we don’t yet know. We’ll just have to wait to see how it plays out. I’m relatively optimistic. I think this is a President who can handle a bunch of strong personalities under him. Crack heads, and see that there isn’t too much rivalry. You can’t eliminate all of it. We’ve seen enough administrations to know that is an impossibility. But I think he can probably keep it under control. Plus I’m hopeful. The issues we have with Japan are not so contentious that they’re likely to create huge divisions between different departments in the government.

RCA: So, we won’t see the battles between State, STR, and Treasury that ….

EL: No, I don’t think so. First, there’d be no battle between State and Treasury on macro-economic policy because Treasury made it clear decades ago that they run macro-economic policy and State should keep their nose out of it. So that’s not much of a battle. You could have battles over trade policy, with State saying go soft on Japan and USTR wanting to do something hard. But we don’t seem to have much of a set of trade issues with Japan. We are not banging on the doors to open up this market or that market with Japan at the moment. And I don’t think that was just a matter of the Bush Administration. I think this has been a change over the past dozen years or so. It started around 1996 or 1997 under the Clinton Administration. I don’t see and hear about opening Japanese markets as becoming a big thing for USTR.

The only contentious issue in that regard would be if the Obama Administration seriously wants to bring the Doha Round of WTO negotiations to a successful conclusion it’s going to be necessary at the high levels of the U.S. Government to put a lot of pressure on Japan. And the Europeans. But Japan would be part of this. So, yes, there would be pressure on Japan, particularly on agriculture. But also some other things. To get Doha finished. I don’t know if the Obama Administration is going to do that.

RCA: So, you’re saying that’s something to watch.

EL: That’s something to watch. There’d be a modest amount of pressure and tension from that. Now, whether State would then say “We shouldn’t push on this …” I’m not sure. I’m not sure they’d even say that.

Turning to Japan’s Down-Turning Economy and Politics

RCA: You know, there are very few people I can think of who can do an interview in English who know more about Japan’s political economy than you. In fact, I’m not sure there’s anybody like that. So let’s switch to Japan while we still have you on the line. And get your views on how Japan is responding, and is likely in the future to respond to this presidential administration change in the United States. Do you have any thoughts on that?

EL: I’m slightly concerned that with the worsening economic situation in Japan which is proving to be a more serious economic downturn than anyone anticipated. Say, six months ago. Including me. That the Japanese government is going to be somewhat inward-looking. In all respects. But we’ll stick to the economic points here. They will be somewhat self-absorbed with their own economic problems. And unfortunately trying to work their way through it at a time when there’s kind of a mess in Japanese politics. Which makes it more difficult to come up with economic policies.

It is conceivable that being inward-looking, they will be less focused on international issues in general, and international economic policy coordination in particular. One could imagine there would be a certain amount of frustration on the part of people in the Obama Administration if they’re trying to put together some kind of coordinated international action. Such as “we should all stimulate our economies.” And then feel the Japanese aren’t moving forward fast enough. Or are not doing enough to stimulate their economy as part of this coordination. I can imagine a person like Larry Summers becoming a little frustrated with the Japanese. Or Tim Geithner. But probably not serious disagreements or issues here.

The Economics of Prime Minister Aso’s 12,000 Grant Program

RCA: This raises a point that’s puzzled me since it was announced. Prime Minister Aso has made part of his second supplementary budget – indeed, a 2 trillion yen part of his second supplementary budget – a grant of 12,000 yen to every individual in Japan. According to the polls published by the Japanese media outlets, something over 70 percent of the Japanese population opposes those grants. What in the world is going on there?

EL: I’m not entirely sure. But a part of it may be the recollection of something that Prime Minister Hashimoto did. In a concession to Komeito. That was the distribution of coupons to families in Japan. Those were tailored to families with children under the age of 21, or something of that sort. And rather than being just a straight cash grant, you got a coupon you could use in lieu of cash to pay for certain kinds of things. But there were a lot of restrictions on it. You could pay your local grocery bill. But you couldn’t use it at the local pachinko parlor.

RCA: Like food stamps.

EL: They were like food stamps. Yes. Also they could be used only at local businesses. These were distributed by municipal governments. It was a national program, but they were distributed by municipal governments. And you could not use them outside your local jurisdiction.

I remember, for example, seeing signs at Narita Airport for shops there. “We accept coupons.” But they could only accept coupons issued in the town of Narita. So the whole thing got to be over-regulated and silly. Some people, I think, never even picked up their coupons. Because you had to go and stand in line at some local office to get them, and things like that.

RCA: Weren’t you in the Tokyo Embassy at the time?

EL: No, I was already back here at that time. It was around 1997 or 1998 that this happened. So, I think there’s a bad taste left over from that program that was widely considered a failure, by the way. And the reason that one was considered a failure was because it didn’t necessarily increase spending. It just meant people used the coupons to spend instead of their own cash.

RCA: What’s going to happen with the current program? I see videos of Prime Minister Aso insisting that this 12,000 yen for every Japanese will solve their problems. Will it really have any effect?

EL: It doesn’t hurt. It is a form of fiscal stimulus. This is like a tax cut. But it’s better than a tax cut. Because one of the problems with a tax cut is that people at the bottom end of the income scale don’t get any benefit from tax cuts because they don’t pay taxes. They don’t pay very much in taxes, so they don’t get much out of the cut. So this is a way to make sure household income for everyone in society increases. And not just people who pay a lot of taxes.

The argument against it that you hear in both Japan and in the United States is that it won’t make any difference because people will save the money instead of spending it. That’s not necessarily true. It depends, in part, on how these things are handled. Often, a one-time grant of money, such as a very temporary tax cut, or this kind of tax disbursement, yes, the savings rate is fairly high because people know it’s just a one-shot deal. And decide to spend a little of it, but to sock the rest away to spend over two or three years, or use it for kid’s college education, or something. Whereas, if you think this will go on for a while longer. Say, a couple of years. People conclude they have more money and decide to spend more money. So it depends in part on the time frame.

It also depends on income levels. Giving people with very little money 12,000 yen probably matters more for low income people than for high income people. Because low income people tend to have either very low savings rates, or no savings. So when they get extra cash they’ve got plenty of things they need to spend it on. Whereas people at the upper income scale may have savings rates that are much higher. So they’ll just sock away a little extra money. Rather than going out to spend it.

That said, what Aso’s proposing to do isn’t bad. Because it is a way of assuring that people in the lower end of the income scale are getting money to go out potentially to spend.

RCA: The DPJ has been making some persuasive arguments that I’m sure you’ve seen too against that program. Indeed, even some people in the LDP suggesting that they may oppose it.

EL: Well, I would be inclined to think this is one where they just want to oppose Aso. So anything he comes up with, they’re likely to be against.

RCA: You don’t think there’s any politics involved here, do you?

EL: Oh, not at all.

RCA: You are one of the very, very few economists who actually understands, and can analyze, politics.

EL: Sometimes politics is more interesting than economics. In this one you probably could criticize this particular plan for being too small. Or because Aso is playing it up as the be-all and end-all of things to save the Japanese economy, and it’s not. It’s just one element in a series of things that might help alleviate some of the extent of the downturn in the economy over the next year. So he probably deserves some criticism. But personally I think the DPJ has gone a little too far. And it’s more about politics than about economic analysis.

Mention of a Consumption Tax Increase in FY2011 in the Next Budget Draft

RCA: If I can, just one final question. Kind of specific, and maybe not well phrased. But there’s a battle going on in Tokyo as we talk here over whether next year’s budget proposal will mention that in FY2011 the consumption tax will be increased significantly. Do you have any thoughts on this?

EL: There are people in Japanese politics who’ve been talking about increasing the consumption tax now for several years. And it keeps getting postponed because they don’t want to do it when the economy is weak. Because they learned in 1997 that raising the consumption tax at a time when the economy is weak is a bad thing to do. That increase from 3 percent to five percent on April 1, 1997, pushed the economy back into recession. So I think they learned a lesson from that. And that’s why today they’re talking about 2011 and not this year for doing it. And I can imagine it being postponed beyond that because we don’t know now just how bad things are going to be. But it is quite likely that the downturn in the Japanese economy will be as bad as that in the U.S. and will last as long. Which means we won’t see the beginning of recovery of the Japanese economy probably until 2010. Which suggests that raising the consumption tax in 2011 might be a little early. Although, again, it’s hard to tell.

RCA: Is this again coming from the Finance Ministry, as it always has in the past.

EL: I would assume so. This has been a favorite tax of the Finance Ministry since the mid-1970s, when they first proposed doing it. It took them a long time to get the politicians around to accepting it, by the late 1980s. I think having done that, they’ve got at least some politicians on their side since the late 1980s. But, yes, this is something the Finance Ministry wants to do because they are very worried about sources of revenue for the government, looking forward.

And they’ve long felt that the consumption tax involves less opportunities for cheating than the income tax. Income tax in Japan has long been subject to a fair amount of cheating by individual households. And the Finance Ministry has never been able to do much about it. The consumption tax is a little bit harder to cheat on. And small businesses, the ones most likely to cheat, were exempted from paying the tax. So that’s not really an issue. Bigger companies have better record-keeping. And they do pay the tax. So the government likes it.

RCA: As usual, you’ve provided us with a lot to think about, and a lot of information. I hope we can call on you again from time to time during this current Administration. Thanks so much, Ed, for your contribution here. I really appreciate your time.

El: Glad to help out.

Concluding Comments

So, there you have it. Thanks again, Ed, for your time, and for all of the interesting points you raise.

Ed and I have known each other for well over 30 years. And when it comes to politics, we rarely, if ever, agree. That disagreement, in addition to his experience and expertise, and his ability to explain complex economic issues so the rest of us can understand them, is why I ask him to contribute to the program. A very different political and econo-political perspective for us to consider.

Thanks for all of the comments on the last three interviews we’ve had this year. And please continue to send them, and your suggestions for future programs, directly to me at RobertCAngel@gmail.com. I can no longer respond directly to each one. Just too many. And that’s a good thing! But be sure that I read each one, and take them all into consideration when preparing future programs. I’m sure Ed’s comments and analysis will generate even more.

Oh, one more thing. When you write in about a particular guest commentator, please let me know if I may share your reaction with the commentator, or if you would prefer that it be kept private. Just a tag at the end of the e-mail is all that’s necessary.

So, with that,

Goodbye All. Until next time.