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?

Thursday, October 18, 2007

David Pilling on Koizumi and Reform

Financial Times journalist David Pilling - who is a very able Japan watcher - has a most interesting piece in the FT today. Since he makes some very simple points in a very clear fashion, I will take the unusual step - for this blog at least - of quoting at some length.

David Pilling makes several points which are very well taken. In the first place, he points out that Japan's recent "recovery" is much more the result of strong external demand than it is of structural reforms. Indeed Japan is very dependent on export growth for GDP growth as Richard Katz also explains.

Kiichi Murashima, chief economist of Nikko Citigroup in Tokyo, has just returned from London. He did not have much fun. After several meetings with investors in both Japanese government bonds and equities, he concluded: “People are losing interest in Japan.” Lack of enthusiasm stems partly from the fact that Japan’s less-than-exciting growth remains dependent on now-more-uncertain external demand. But underlying the disappointment is a deeper concern that political paralysis resulting from last month’s collapse of Shinzo Abe’s administration will lead to policy seizure.

Superficially, such fears are understandable. Last month Yasuo Fukuda, a 71-year-old man in a grey suit, was hustled into office by a few faction bosses of the ruling Liberal Democratic party. The selection smacked of old-style Japan before Junichiro Koizumi, the last-but-one prime minister, subverted convention by appealing directly to public support.

Secondly Japan is now suffering from some form of "reform fatigue", and this will be important as we move forward:

Worse for the worriers, Mr Fukuda, a consensus-style politician, assumes office at a time of apparent backlash against “Koizumi reforms”. In July the ruling party was punished in upper house elections by voters in poorer parts of Japan, for whom five years of recovery has had little tangible effect.

Outside of the labour market and the banking sector - which mainly happened before Koizumi arrived - there has been very little in the way of real structural reform, and even less in the way of "fiscal consolidation". The biggest genuine Koizumi reform was postal privatisation, but this did not start until a year after he left office and will not be completed until 2017.

There is a misunderstanding about the nature of structural reform and what role, if any, it played in Japan’s recovery. At the best of times, “reform” is a sloppy word used to mean “good change”, a convenient sanctuary for politicians unwilling to concede that not every new law they instigate is beneficial. In Japan, where it has been conflated to mean both fiscal consolidation and deregulation, the term is less illuminating still.

What role did either cutting budgets or pushing deregulation under Mr Koizumi have in boosting growth? Almost none. When he took over during a banking crisis in 2001, he promised to slash government borrowing. Fortunately, he did no such thing. To have done so would have risked tipping the deflation-riddled economy into even deeper recession. He did cut public works budgets. Towards the end of his tenure, he brought overall spending under control and raised revenue through stealth taxes. This may have been good for the long-term health of Japan. But few economists, if any, have argued that it spurred recovery.

Deregulation can accelerate growth. But most Japanese deregulation – for example in the financial and retail sectors – was instigated before Mr Koizumi arrived on the scene.

Lastly, Pilling emphasises, it has been strong external conditions which have given the seemingly positive result, in the Japanese case China, and in the German one Eastern Europe (this part is, of course, my view).

The real key to recovery under Mr Koizumi was the beneficial effect of a booming China on exporters and success in getting banks in shape. Exports were helped further by massive currency intervention to keep the yen low. Even in Japan’s muddled debate, that policy was never classified as reform.

At the end of the day I cannot but agree with David Pilling's concluding remark.

There are legitimate reasons to worry about Japan, not least the failure of wages to rise and consumer demand to stir. But concern that Mr Fukuda will tear up Mr Koizumi’s reform manual is not one of them.

There are, note are, reasons to worry here, and plenty of them. As Pilling would also point out, we are still mired in deflation and there is now real sign of this problem going away.