A funny thing is happening on the road to applying ``Reaganomics'' to Asia's biggest economy: A growing number of Japanese don't seem to like it very much.
Forty-two percent of those responding to an Asahi newspaper survey said their livelihoods deteriorated under the leadership of Prime Minister Junichiro Koizumi. Just 18 percent said they are now better off.
That may come as a shock to investors driving the Nikkei 225 Stock Average toward six-year highs amid hopes Japanese households will spend more. It may also surprise those eyeing Japan's property market after 10 years of aggressive avoidance.
No one is likely to be more taken aback than Koizumi, who this week marks his fifth anniversary as premier. In April 2001, he took charge of a deflation-plagued economy, promising ``reform without sacred cows.'' In retrospect, we know that was code for adopting policies Ronald Reagan applied to the U.S. in the 1980s.
Koizumi pushed through a series of Reaganesque steps like spending cuts, tax reductions for the wealthy, privatization and deregulation. Given Japan's preference for consensus over conflict, Koizumi had to move more gingerly than President Reagan did, or Margaret Thatcher did as British prime minister. Still, the direction has been clear enough.
Now, with Japan's economy on solid ground and deflation in its last throes, Koizumi is looking for his pat on the back. Here, Japan watchers and investors would be wise to heed the signals coming from the nation's 127 million people.
First of all, China gets most of the credit for Japan's revival, and not just because of its fast-growing demand for Japanese goods. China's real role was as a catalyst for change.
For a decade after Japan's bubble burst in the early 1990s, executives sat on their hands believing asset prices would recover and save them from making hard decisions. The sudden appearance of China and the forces of globalization changed that. Roughly five years ago, Japanese executives realized the Nikkei wasn't going to return to its 1980s levels. They also saw that Japan risked being eclipsed by a nascent superpower.
Quietly, companies began shifting production abroad, cutting costs, selling extraneous businesses and paying down debt. Banks, partly due to prodding by Koizumi's economic team, finally disposed of the bad loans acting as a headwind on growth. Many industries began consolidating.
These actions, largely predicated on China's advance, led to the most organic and convincing recovery Japan has seen in 15 years.
Secondly, Japan is just beginning to consider the social costs of some of Koizumi's policies. During his tenure, the government has trimmed pension and health benefits. Among other changes, inheritance tax laws were altered to simplify the transfer of large assets, and capital-gains taxes were lowered.
It's classic trickle-down economics. While Reaganomics fans think it did wonders for the U.S., its applicability to Japan is questionable. It's leading to an erosion of Japan's cherished egalitarianism and causing considerable soul-searching. The national media are covering the trend with the intensity of a political scandal.
Proponents tend to think the end of Reagan's massive debt buildup justified the means. As long as the U.S. moved toward free-market economics, the thinking went, it's all good. Yet Japan lacks a crucial element the U.S. relied on to offset Reagan's experiment: dynamic innovation.
Japan's system is still more about job protection (supporting huge companies that employ tens of thousands) than job creation (new startups that might eventually employ tens of thousands). It's less about tax policies or smaller government than a societal aversion to taking risks; it just seems more Americans are willing to fail than Japanese. Without more innovation, trickle-down economics will have a tough time in Japan.
At the same time, Koizumi hasn't matched Japan's debt sales with the kinds of tax cuts that might benefit the broader economy. Japan doesn't need to make rich people who invest in stocks or real estate even richer; what it needs is babies.
Because of a low birthrate of 1.26 children per woman, Japan's population actually shrank in 2005. If you are going to cut taxes, why not do it for young families to boost the nation's birthrate? Without a significant increase in the number of births, Japan may never get out from under its debt load. Its debt-to- gross-domestic-product ratio is about 151 percent, the highest among developed nations.
Look Ahead, Not Back
The brilliance of Reaganomics is that it was partly a head fake. In 1983, the federal budget deficit reached 5.9 percent of GDP, a record that still stands despite President George W. Bush's best efforts. And when Reagan left the White House, federal spending had almost doubled. Many ignored the mountain of debt being created because they believed the economy would be better off.
The widening gap between Japan's rich and poor may actually do the opposite: leave households less optimistic, less inclined to spend their savings and less open to globalization.
Koizumi will step down in September. His successor will quickly find that, in many ways, the heavy lifting on Japan's economic modernization is just beginning. The next premier will have to trim debt, shore up the national pension system, boost entrepreneurship and make high-cost Japan more competitive in low-cost Asia -- things Koizumi hasn't bothered with.
Japan should look ahead to new and innovative solutions to its challenges, not back at Reaganomics.
Japan Real Time Charts and Data
Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Japan related comment. He also maintains a collection of constantly updated Japan data charts with short updates on a Storify dedicated page Is Japan Once More Back in Deflation?
Friday, April 28, 2006
Better, or Worse-Off?
Most people in Japan seem to think that their living standards have deteriorated under Koizumi. That is the surprise finding in the latest Asahi survey. Apart from his commment that "Japan's economy is on solid ground and deflation in its last throes" (which I don't fopr one moment accept), he makes some worthwhile points:
Posted by Edward Hugh at 8:28 AM