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| JAPAN'S PLAN
December 17, 1997NewsHour Transcript |
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Reacting to economic turmoil in Asia and stagnation in his own country, Prime Minister Hashimoto proposed a $15 billion income tax cut to stimulate Japan's economy. Following a background report, Elizabeth Farnsworth and guests discuss Japan's new economic plan and its global implications.
A RealAudio version of this segment is available.
NEWSHOUR LINKS:
December 12, 1997:
Michel Camdessus, Managing Director of the IMF,discusses his organization's bailout of South Korea.
An Online NewsHour Forum:
Asia's economic crisis.
December 4, 1997:
The international bail-out of South Korea.
November 26, 1997:
What did the APEC summit accomplish?
November 25, 1997:
Asia's leaders search for answers at the APEC meeting in Vancouver.
November 24, 1997:
Asia's grim economic forecast.
October 28, 1997:
The instability of Asian stocks causes worldwide fluctuations.
October 23, 1997:
The Hong Kong stock market drops 10 percent.
November 21, 1996
A panel of experts discuss President Clinton's Asia-Pacific Tour.
Browse the NewsHour's coverage of Asia.
OUTSIDE LINKS
International Monetary Fund
APEC
PAUL SOLMAN: It wasn't so long ago that we, among others, were enthusiastically reporting it--Japan's modern factories made an industrial juggernaut, a manufacturing world beater. Japan's work force could happily out-perform anyone else's at almost any task imaginable. And there was no end in sight, since Japan's kids were better disciplined and better educated than any on earth. The secret of
success was that Japan had an arguably better way of doing business, captured in the title of the best-selling comic book, "Japan Inc.," shorthand for Japan, Incorporated, shorthand for an economic system based on a long-term vision of hand-in-glove relationships between workers, businesses, and the government. And, indeed, Japan, Inc. had created the world's biggest banks, the world's hottest stock market, the world's highest land values.
KENICHI OHMAE: Right here where we are standing is the most expensive residential area in Tokyo. That means in Japan.
PAUL SOLMAN: How expensive?
KENICHI OHMAE: Well, the price, according to the latest government statistics, is a square foot of this property over here, that is the size of my--a little smaller than the size of my handkerchief--is $22,000.
PAUL SOLMAN: $22,000 for that much land?
KENICHI OHMAE: That's it, yes.
Japan's economic ills.
PAUL SOLMAN: The Japanese had become wealthy and, like most wealthy people, they invested even more, further fueling their miracle economy. And then came the 1990's, at which point the Japanese economy, the world's second largest, began to buckle, or to use the cliche of choice, the bubble burst. Japan's stock market, near 40,000 at its height, plummeted below 15,000. The value of real estate collapsed as well. The great big banks turned out to have loaned money on the basis
of those high stock and real estate values. They'd also made their loans to those with whom they had those long-term hand-in-glove relationships. Some of the relationships turned out to be corrupt. Some of the banks began to go under. The yen, which had been strengthening
for years, declined in value; Japanese consumers stopped spending their money; and then after other Asian stock markets fell this autumn, the Japanese stock market crashed yet again, leading to the once unthinkable--the shutting down of the nation's fourth largest brokerage firm, Yamaichi Securities, which closed its doors last month as its top executive sobbed a public apology. After several years of resisting pressure from the United States and others to stimulate the Japanese economy, yesterday, Prime Minister Ryutaro Hashimoto called for a $15 billion income tax cut.
RYUTARO HASHIMOTO: (speaking through interpreter) Based on the current economic situation, we decided that a bold policy needed to be considered, and we decided to implement an emergency special tax cut.
PAUL SOLMAN: This came on top of another plan described yesterday as a $77 billion aid package for ailing financial institutions. There was an immediate reaction in Tokyo to all this as the stock market rebounded there, and the yen rose in value against the dollar.
ELIZABETH FARNSWORTH: Joining us now are economist Hugh Patrick, who directs the Center on Japanese Economy & Business at the Columbia University Business School, and Mike Mochizuki, a senior fellow at the Brookings Institution, specializing in Japanese domestic politics and foreign policy. Thank you both for being with us.
HUGH PATRICK: Hello, Elizabeth.
ELIZABETH FARNSWORTH: Hello. Mr. Patrick, you heard the list of problems Japan has that Paul's just gave us. How might tax cuts help solve some of these problems?
The implications of the income tax cut.
HUGH PATRICK: Well, the economy has faltered this year as a result of an exceptionally restrictive fiscal policy that was undertaken at the beginning of the year. And this new injection of demand, first of all, should increase spending and get the economy going and in terms of restoring demand, and more importantly, hopefully, it will overcome the deep pessimism that exists among Japanese businessmen and others, and restore a sense of confidence. And it's confidence that is needed most of all right now.
ELIZABETH FARNSWORTH: Mr. Patrick, lots of countries have tax cuts and they don't become front page news in the United States. Why is this one so important?
HUGH PATRICK: Well, first of all, the Japanese economy is so important. It's the second largest economy in the world. Secondly, it's performed so poorly over the course of the 90's, as has been suggested, and thirdly, the government in this year's fiscal program, starting
April 1, shifted from stimulus in the budget to one of strength. Prime Minister Hashimoto made the judgment that reducing the budget deficit was of high priority, and he thought the recovery of the economy was doing well enough that that would work out all right. As it turns out, the economy stalled, and it hasn't crashed, but it certainly isn't going anywhere at all. And it's to get the economy restored, and the recovery on track again, that this stimulus becomes so important.
ELIZABETH FARNSWORTH: The economy really stalled, and yet it took a long time to come to this stimulus package. Why? What politically was happening?
MIKE MOCHIZUKI, Brookings Institution: Well, politically it was a very embarrassing moment for Prime Minister Hashimoto because he had calculated that the Japanese economy was quite strong and so he could withstand a tax hike. And he was proven wrong, but as recently as last month, the Japanese Diet passed legislation committing Japan to reducing its growing budget deficit, so they were really political committed to fiscal austerity. And so to view this U-turn would have been political embarrassing, but the economic situation in East Asia had really worsened beyond anybody's predictions; therefore, he finally acted.
ELIZABETH FARNSWORTH: And they had to have what you referred to as austerity because the deficit poses dangers too, right?
MIKE MOCHIZUKI: Right. But that's a long-term concern. The deficit has ballooned up to about 5.4 percent of Gross Domestic Product, and that's one of the highest of the advanced industrial countries. And the Japanese population is aging rapidly, so given that, I can see government's interest in the long-term to restore some sort of fiscal balance. But in the short-term the Japanese economy was still in a period of stagnation. Then to move towards a tax hike was really a miscalculation.
HUGH PATRICK: I think that that's entirely correct, and I would stress that the decision was really one of timing. When should they try to pursue this austere budget policy? And they did it one year too soon. And that has turned out to be a terrible miscalculation, but a miscalculation which many people endorsed at the time, which was about a year ago, when these policies were being worked out.
ELIZABETH FARNSWORTH: Mr. Patrick, does this mean that Japanese leadership has accepted what the President--President Clinton has asked Japan to do, which is to be--I think the term was the locomotive to pull the rest of Asia out of its problem?
Is Japan the locomotive of Asia?
HUGH PATRICK: Well, that's very nice rhetoric, but--and, of course, he is able to say to President Clinton and to others, yes, we are trying to help the world, as well as helping ourselves, but the political reality and economic reality is the Japanese economy desperately needs stimulus and it needs to revive itself, and it shows domestically that it's being driven. Of course, it's very nice to be able to say we're doing this for the sake of the United States and the sake of the world, and that's also true, but in the calculus of this, I think it's very domestic in the considerations that are dominant.
ELIZABETH FARNSWORTH: And, Mr. Patrick, as an economist you think this will stimulate the economy?
HUGH PATRICK: Well, I think that it certainly will be an important step and a forward start. It's still not clear what he has in mind exactly. As I understand it, he wants to have this fiscal stimulus of about $15 billion happen immediately, during this fiscal year, between now and next April 1.
ELIZABETH FARNSWORTH: Excuse me for interrupting you, but this would actually put money into the pockets of consumers because they would get a tax credit against taxes due next year, right?
HUGH PATRICK: That's right.
ELIZABETH FARNSWORTH: About $300?
HUGH PATRICK: That's right. And the important thing is they would get it right away. The dilemma is that if he only does it as a one shot deal between now and April 1st, and then goes back to the old tax system, people may just simply put the money in the bank and not go out and spend it because they don't see it as an effective ongoing stimulus. So I would urge that if it's going to be done, it should be done both this year and next year, which would mean two trillion yen or $15 billion a year this fiscal year, and for the next fiscal year starting April 1.
ELIZABETH FARNSWORTH: And Mr. Mochizuki, what's your view on whether this might jumpstart the economy?
The structural problems of the Japanese economy.
MIKE MOCHIZUKI: I think it will have some effect. It will definitely stop any danger of a downward spiral, deflationary spiral in Japan. But I'm somewhat skeptical about whether this will really do the trick. I mean, there really are some structural problems in the Japanese economy. Japan has allowed its banking--bad loan problem to fester, and that's really dampened growth. And that really has to be dealt with very quickly. The other is they move much slower on deregulation, and you really need deregulation to jumpstart some of the entrepreneurial spirit that's necessary in this time of dramatic economic transformation.
ELIZABETH FARNSWORTH: And these problems that you call structural, how serious are they? What's really at stake here?
MIKE MOCHIZUKI: Well, what's really at stake is that Japan has a duel economy. The manufacturing sector is still very, very strong. Profits are very high, and they're most competitive in the world. But it's the service sector that's very competitive, and it's really kind of like a cancer in the Japanese economy. And they really have to deregulate and revitalize that if they really want to have long-term growth.
ELIZABETH FARNSWORTH: Mr. Patrick, I want to know what you think is at stake here. I want to read this quote from the prime minister. He said when he announced this proposal, "I have said both domestically and abroad that we can't trigger a worldwide depression beginning in Japan." Is that what's at stake here? We're talking about problems that could lead to a worldwide depression?
ELIZABETH FARNSWORTH: And, Mr. Patrick, tie this all into the wider Asia crisis which we've been discussing, but the bank loans are a problem not only because of domestic bad loans, but because Korea, for example, may default on some of its loans, right?
HUGH PATRICK: Well, the bad loan problem is exacerbated by the loans to Korea and other Asian countries, though I suspect that there's not going to be a great series of defaults like we had in Latin America in the late 1970's. But the bad loan problem is primarily domestic in origin and in size and in nature in Japan, and it's been festering from the early 1990's. Basically all the collateral against those loans was real estate, and the real estate prices have dropped so much that the loans can't be covered by the real estate, and the loans that were being made were to companies that can't generate the income to pay them off.
ELIZABETH FARNSWORTH: And, Mr. Mochizuki, is it the bad loans problem that makes people worry even slightly about a very deep recession in Japan and perhaps even causing a depression?
MIKE MOCHIZUKI: Right, because a bad loan problem has caused or contributed to this economic stagnation. I think I had some real concerns that if the Japanese citizen gets $300 from this tax break whether they're really going to go out and spend. I think many of the citizens will be risk averse and probably save that money, and so it really is not going to have the stimulus kind of effect that probably Prime Minister Hashimoto wants.
ELIZABETH FARNSWORTH: And how does this affect the average American consumer, all that's happening in Japan and especially the tax cut and the stimulus?
MIKE MOCHIZUKI: Well, I think one of the dangers if that we've put a lot at stake in emerging markets in East Asia, and that was a way of really revitalizing our economy, and it's worked so far in the early part of the Clinton administration. But the other concern is that one way that Japan could try to get out of this economic problem is to export its way out, and it might be good for the American consumer that cheap goods are coming from Japan, but it might not be so good for the American producer, who will be affected by these products.
ELIZABETH FARNSWORTH: Well, thank you both very much for being with us.
HUGH PATRICK: Thank you.
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