Resolving The Policy Debate on the Japanese Economy

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As the economic indicators become worse and worse, the policy debate for the Japanese economy seems to get into turmoil. There is irresistible cry for the scapegoat, and many people rushed to blame the Bank of Japan for its "too little, too late" response to the ongoing deflation. But the Bank of Japan is ready to accelerate their monetary easing on the premise that the government moves swiftly for "structural reform." The government and the BoJ is in the situation of Prisoners' Dilemma, or the steal mate. The best for the Japanese economy is that the government takes action for the structural reform and, in the same time, the BoJ accelerates the quantitative easing of money. This is the best move for both the government and the BoJ. The worst case scenario for the BoJ, however, is that they were to be forced to take monetary easing, while nobody takes any actions for the structural reform. The BoJ has already moved twice this year: they eased monetary policy in March and August, while there has been no notable consequence concerning the structural reform, especially the non-performing loan problem. The Bank of Japan is now quite suspicious about the move by the government, banks and corporations for the structural reform, and it has good reasons for its suspicion.

There is also a new argument in economic policy debate recently. Many people are claiming that Japan needs a new policy to stimulate people's consumption. Such a policy gets many people's attention because it is rather a new idea. It is new to people because they have never argued this topic. And the reason why consumption stimulus was not included in the past policy debate is that it was not a government's matter In the past decade, every thinkable macroeconomic policy tools were tried but failed: Public works, tax cut, 6 billion dollar coupons for children and elders (= subsidy for general public), and of course monetary easing to "zero interest rate" level. We need to expand the aggregate demand to escape from this persistent recession. There is one thing we did not try; the expansion of consumption. That is the reason why consumption stimulus is today's popular argument. The policy proposed for consumption stimulus is a complex of tax incentives, deregulations and new social services. Each of which is a reasonable but not quite striking measure. The reason why people expect out of the consumption stimulus is that the word "consumption stimulus" sounds brand new. We can forget the severe reality by arguing about the new policy regime for consumption stimulus.

The truth is that we have a huge amount of non-performing assets that has to be resolved in Japan. Many economists and policy discussants, including us, argue that the accumulation of non-performing asset is not only the result of the ill performance of economic activities in the past. It is also the cause of the persistent stagnation in the future. We need to recognize that our country is in the "negative spiral" in which deflation makes the non-performing loan (NPL) problem more severe, The NPLs make the financial system vulnerable and economic activities stagnant, and the stagnation causes further deflation.

To resolve the confused policy debate, we need to look straight at the non-performing asset (NPA) problem, and to elaborate overall economic policy, understanding the NPA problem is the central issue.

The Research Institute of Economy, Trade and Industry (RIETI), American Enterprise Institute (AEI) and The Yomiuri News Paper will jointly hold a conference on the NPA problem and the policy for Japan's economic recovery. See the conference program attached after this essay for the detail. Please access http://www.rieti.go.jp/events/e01092501/010925_01_e.html to apply.

Please access to the below page and fill in the form for the registration. http://www.rieti.go.jp/events/e01092501/010925_01_e.html

Please be noted the seats are available for the first 490 people.

Author, Keiichiro Kobayashi
Fellow
Research Institute of Economy, Trade and Industry, IAI
e-mail: kobayashi-keiichiro@rieti.go.jp

Editor in Chief, Nobuo Tanaka
Vice President, Senior Fellow
Research Institute of Economy, Trade and Industry, IAI
e-mail: tanaka-nobuo@rieti.go.jp
tel: 03-3501-1362 fax: 03-3501-8391

The opinions expressed or implied in this paper are solely those of the author, and do not necessarily represent the views of the Ministry of Economy, Trade and Industry (METI), or of the Research Institute of Economy, Trade and Industry (RIETI).