Koizumi's Team Looks to Supply-Side Economics to Transform Japan
Breaking with the tradition of 10 unsuccessful years of "Keynesian" demand-side economics, they are now looking towards the blunt supply-side methods used by Ronald Reagan's government to beef up the U.S. economy.
A program of structural reform unveiled last Thursday by State Minister for Economic and Fiscal Policy Heizo Takenaka, drew obvious inspiration from the approach dubbed "Reaganomics" after the U.S. fiscal policies followed during the double term of the former president.
This approach was characterized by rampant deregulation and tax reforms -- handing the baton of economic initiative to the private sector.
"We are going to implement explicit supply-side policies," professor Takenaka, an economist with the prestigious Keio University, told foreign reporters.
Since the 1990 collapse of the 80s speculative bubble, conservatives within the ruling Liberal Democratic Party (LDP) had attempted to prop up the ailing Japanese economy with large, sustained doses of fiscal stimulation.
This strategy consisted of throwing unrestricted quantities of public cash into the backward economic and social sectors which traditionally support the LDP, delaying the major structural adjustments undertaken in the meantime in the U.S. and Europe.
In addition, it led to the ruin of public finances, instilling in Japanese consumers a fear of tomorrow, subsequently reflected by an unchecked rise in savings rates.
"Japanese consumers are perfectly rational. They are considering their life cycle of income," said Takenaka
"The only way to increase the life cycle income is through deregulation and supply-side reforms," he added.
"In the long run, the only way is to promote supply-side reform."
In other words, the revival of private consumption, which counts for more than 60 percent of the Japanese gross domestic product, requires the offer, on the initiative of the private sector, of new products and services, to generate new employment.
Endorsing studies by economist Haruo Shimada, another leading light at Keio, Takenaka's program asserts that five million new jobs could be created by extending the it revolution and developing services to enhance people's livelihood.
This would more than compensate for the hundreds of thousands lost in traditional sectors -- such as construction, distribution and real estate -- expected to suffer most from the banking sector bad loans disposal programme, a priority of the Koizumi team.
The first of seven chapter headings of the structural reform program focus on privatization and deregulation. The Koizumi team has already displayed the will to tackle "sacred cows," such as the postal system and dozens of state-dependent bodies which form Japan's enormous public sector.
The tax reforms will have to encourage risk-taking, entrepreneurship, and individual initiative.
"Full scale tax reform will have to wait two or three years," admits the minister. But, he adds, "But some tax reform to provide some kind of incentives will come this year and next year."
Socially, this new direction in Japanese economic strategy should benefit the urban middle class in large cities, which deserted LDP's candidates over the past few elections.
But resistance could be strong in sectors heavily reliant on public subsidies, particularly rural areas and regulated and protected industries.
The prime minister has pledged to cap at 30 trillion yen the net issuance of government bonds, which implies deep cuts in public expenditures. Rigid allocation of fiscal resources, such as the road tax, will be reformed, to the detriment of rural areas. And regional and local authorities will be granted more power, but also less money from the central government's coffers.
"There are groups with vested interests not only in the LDP but also within the opposition parties," said Takenaka.
The success of the plan "depends entirely on the leadership of the prime minister", he said, adding that "popular support is quite important since we are living in a democratic society."