Video Conference on the Japanese Economy
Transcript of the Video Conference
On 15 April 1999 faculty and students at the Maxwell School of Citizenship and Public Affairs held a video conference with Faculty and students of the Graduate School of International Relations at the International University of Japan.
The Participants
The IUJ participants included Akinori Marumo, Vice President and Professor of the Graduate School, Leszek Buszynski, Dean of the Graduate School of International Relations, Kenneth M. Stokes, Associate professor for International Relations and International Political Economy, and four students: Laura Trigo, Kaoru Hisaeda, Keo Rottanak, and Masahiro Suzuki. The Syracuse participants included Matt Bonham, Chair of International Relations, David Richardson, Professor of Economics, Theresa Greaney, Assistant Professor, Economics, and six students: Joyce Atkins, Megumi Doi, Jerry Kalarikal, Kameke Sweeney, Ching-I "Sarah" Hou, and Sourabh Gupta.
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Opening Remarks
Sourabh: I am Sourabh Gupta and I have had the opportunity and privilege of being at IUJ last semester. It was extremely, extremely interesting and I really look forward to this videoconference. Hello.
Dave: Hi, I'm Dave Richardson. I am a Professor of Economics and International Relations here at Syracuse University. I work also in Washington with Fred Mertson's Institute for International Economics and it's a privilege to be here tonight with you to discuss the issues that are on the table and with you as students as well as with our students, I'm looking forward to this.
Theresa: Hi, I'm Theresa Greaney. I'm an Assistant Professor in the Economics Department here. My particular area of interest is U.S-Japan trade relations and international trade in general. I have spent some time in Japan doing research. Most recently I spent six months in 1997 as a visitor at Tokyo University at their Economics Department and before that I've been a visitor at MITI at their research institute.
Joyce: Hi, I'm Joyce Akins and I am a first-year and I'm a first-year graduate student in the International Relations Program. My concentration is development policy and my geographical concentration is Asia.
Megumi: Hi, I'm Megumi Doi and I have been studying in the International Relations Program since September 1997 and my concentrations are East Asia and Global Markets.
Jerry: Hi, I'm Jerry Kalarikal and I am also a first-year Masters student in International Relations. My areas of interest are international economic policy and Asia.
Kameke: Hello, my name is Kameke Sweeney and I'm a first-year student in International Relations and Economics and my region, my geographical region is Asia and my concentration is international economic policy.
Sarah: Hi, I'm a graduate student in International Relations. My concentration is in Global Markets and my geographical area is Western Europe. Thank you.
Matt: Let's go to your side Leszek. Take it away.
Leszek: Thank you, thank you very much. First of all I would like to welcome the Syracuse people to this first ever videoconference. And we are very proud of this arrangement. It is morning here in Japan. The morning of the 16th of April. It is a very sunny day. The sakara are blooming in Japan starting in Osaka, but they haven't bloomed yet where we are. There's still plenty of snow about. I am the Dean of the Graduate School of International Relations, Leszek Buszynski's my name and I would like to introduce Professor Marumo who will be talking to us about the Japanese economy. Professor Marumo.
Marumo: Good evening, Ladies and Gentlemen. My name is Marumo, I am a Professor in Graduate School of International Relations. I have worked for the Government for a long time and then came to this University. My specific area is macroeconomics, macroeconomics policies of Japan and the United States. I am very happy to have this opportunity to speak with you. Thank you.
Kaoru: Good morning, my name is Kaoru Hisaeda. I'm a first-years student in international relations or international developing planning. My concentration is how we can organize developing planning in developing countries and I have also an interest in the Japanese economy. Thank you.
Keo: My name is Rottanak from Cambodia and I am a second-year student in the Masters program here. My area is in international development with a concentration in international politics and economic development. Cambodia is my primary interest. My secondary interest is very much the Japanese economic problems right now so I am really looking forward to this evening.
Masahiro: My name is Masahiro Suzuki. I am from Tokyo and I am a first-year student in the international program. I am interested in international economy. Officially an international form of.... Thank you.
Leszek: That's it from our side. Shall we begin?
Matt: Leszek, yes, we're ready.
Leszek: So I would like to present Professor Marumo to present his presentation on, and it's entitled, "Stagnation of the Japanese Economy," which is a rather ominous title.
Marumo: I'll speak about the stagnation, which is not a very happy situation at all. But I will speak about the long stagnation of the Japanese economy since the beginning of the 1990's. That is almost a 10-year-old stagnation. Why did the Japanese economy, which grew much faster than other industrial countries for more than 45 years after the War, World War II, why did she begin and continue to stagnate for nearly a decade? Who was responsible? What went wrong? What has been done to remedy the situation? What is the near-term prospects of the current account? What should be done to get out of this doldrums? On those points I will speak.
First, about the causes of the stagnation. The most basic factor is behind the stagnation was the bursting of the bubble in the beginning of the 1990's, particularly the drastic decline of land and stock prices and the redundant deterioration of balance sheets of many, or rather, most of Japanese business firms and financial institutions. There is too much debt and the big problem of bad loans of banking institutions. Before that, between 1985 and 1990, the economy grew at 4 ½ % per year and stock prices and land prices, in particular, more than doubled -- nearly tripled in only five years. And also, business fixed investment in plant and equipment as a proportion of the GDP shot up from 16% in 1985 to nearly 20% in 1991. Twenty percent that is a ratio rarely observed even during the height of the rapid growth area of Japan during the 1960's when the economy was expanding almost at the 10% per year rate.
So it was only natural that the recession which began in early 1990-91 should have lasted longer than the average recessions before that. That is, there was a big element of large-scale stock adjustment. Stock adjustment not only in the plant and equipment but also too much housing construction and too much purchases of consumer durables, particularly automobiles. What made the situation much more serious was the steep and the continued decline of asset prices. Stock prices were reduced then to less than half of its peak of at the end of 1989. You know the NIKKEI average, tanked from 39,000 yen to (for a short period of time) to 13,000, while land prices in most urban areas were reduced by more than say 70%. Total loss of asset value of those stocks and land values amounted to much more than 1,000 trillion yen, which is double the size of the Japanese annual GDP in recent years.
The situation became even more serious through policy mistakes. The Bank of Japan did not take easy monetary policies promptly, but maintained high interest rates policy for awhile, even after the stock prices began to decline since the beginning of 1990. When the American stock prices declined sharply in October 1987, Chairman Greenspan of the FRB took quick action in the direction of aiding the monetary situation. The Bank of Japan did exactly the opposite. As for the fiscal policy the first real anticyclical measures were decided on in August of 1992; that is, more than 18 months after the peak or after the recession began. And this was the second longest delay in the postwar periods.
However, in the following two years, recovery proceeded rather strongly. The rate of economic growth in terms of real GDP amounted to 1 ½ % in 1995 and 5 percent in the year 1996. At that time, at least towards the end of 1996 and very early in 1997, many people thought that finally the Japanese economy came out of the long stagnation and began to record a sustained growth, mostly upon the expansion of private sector demands, such as business-fixed investments and housing investments. For instance, business investments in plant and equipment and, in real terms, rose a strong 11% in 1996 after an increase of 5% in the previous year. Unfortunately, however, the economy plunged into another recession since April of 1997. As I will explain in detail later, this was almost entirely due to the policy mistakes on the part of the Government. And, the economy is still, in April 1999, today, and is still plagued with negative growth and high unemployment even today. As a result of such a lackluster performance, the operating growth rate of real GDP between the years 1991 and 1998 amounted to only 1 point per year percent per year compared with 3.1% per year growth of American real GDP for the same period.
Now, how badly is the current situation. Real GDP declined for five consecutive quarters up until the last quarter of last year. Growth for the calender year 1998 was -2.8%. Employment situation deteriorated and unemployment rate reached 4.6% in February, opposed to a high, of course; and the unemployment rate in Japan became even higher than that of the United States, 4.2% for March. Particularly worrisome is that business investment and planned equipment plunged so fast. The amount for October, December last year was 17% in real terms below what it was one year ago. Most responsible for the current recession that is since spring of 1997 was a mistake of fiscal policy. The Government and the Prime Minister, Hashimoto, took measures to restore budget balance prematurely - prematurely - very, very prematurely. For instance in fiscal year 1997, the Government decided to increase tax and non-tax burden including high consumption tax rate from 3 to 5%, totaling around nine trillion yen. In addition the government investments were reduced by three trillion yen. In total twelve trillion yen, which was about 2 ½ percent of the GDP and around one hundred billion US dollars. In addition to that the initial budget of the fiscal year 1998 was very restricted. In their government investments were planned to be reduced by 8%. And, it was only April of last year that the Hashimoto administration decided on a large-scale fiscal package of stimulative measure. Their implementation began only in autumn of that year. Meanwhile, the economic situation continues to deteriorate and people's confidence waned rapidly.
Additional factor was the Asian currency crisis, which began July 1997. Also, as a background factor, the unsolved big problem of bad loans of banks and consequently the instability of financial systems loomed large in making businesses and consumers more and more reserved and more and more pessimistic. This aggravated the situation through investment reduction on the part of the business and more cautious spending attitudes of consumers.
Now, how do we get out of the stagnation? Of course many people have been trying to point out many remedies on what we should do, but unfortunately I have no simple answer, clear answer to that. At least, I think, we should proceed on three dimensions simultaneously. First, of course, is renovation and revitalization of the financial system including, of course, the solution of the bad loans problem. Second, the Government should continue anticyclical, fiscal and monetary measures on a larger scale and on a sustained basis. Last year, although belatedly, the Government decided on two larger scale fiscal stimulus packages; one in April amounting to 140 billion dollars and another in September nearing 200 billion dollars. Thanks to these measures the decline of economic activities seems to have stopped in recent months. However, the initial budget for fiscal year 1999, which began this month, was very modest as usual. Therefore, government investments, which is increasing very rapidly since last autumn and may continue to do so for the coming months, is expected to taper off after autumn of this year. So it is necessary for the Government to make additional investments and/or tax cuts to stimulate and maintain the recovery.
Until we can see clear signs of sustained recovery of the economy based mostly on the increase of the private sector demand, a premature return to prosperity will negate the effects of the efforts that are being taken as we experienced in 1997. Third, what is necessary is structure reform and their regulations. Too many have spoken about these topics too often so I will stop here. Thank you very much.
Leszek: Professor Marumo has finished his presentation. It's over to you Matt.
Matt: Thank you very much Professor Marumo. That was a very comprehensive review of a very complicated situation. We're going to open it up to our side now for discussion and question. Any one?
Theresa: Yes, I'd like to ask a question that maybe you have a better perspective on being in Japan during this crisis. What makes this today's problems particularly difficult and different from problems that Japan has adapted to so well in the past? I'm thinking particularly of the oil crisis in the 1970's and the yen's drastic appreciation after the Plaza Accord in 1985. In my Japan Economy class with the students who are in front of me, we have discussed how Japan responded to these drastic changes so well. Why has Japan not been able to respond as well to the crisis of the 1990's?
Marumo: Well, that is a very good question and initially, I, myself, thought also that although the recession, after the bursting of the bubble, may be quite severe, but I hoped, I expected that we would get over with it rather quickly in two, three, maybe four years. And, also, I'm teaching Japanese economy in this University and I have been proudly taught about how Japan's economy has managed to get out of the difficulty and oil shocks and begin operations. But unfortunately this time around it was quite different. But what was it? What was different? I think there are two major factors. One was before mentioned very serious policy mistakes. Government was very slow in acting to rectify the situation, even in a cyclical downturn. Because many thought, and particularly the Government thought, it will be quickly, not very quickly but in a few years at least, the situation will come back. Then, many expected that the situation, bad loans problem, will be solved gradually and also many expected that land prices will not continue for so long on such a large scale. That is policy mistake and also as I emphasize, the Japanese economy was always fundamental problems of bad loans problem, but almost nicely began to recover in 1995-96. Over those two years the average economic growth was 3 to 4%, which was quite respectable. But the Government made very, very, big serious mistake in taking premature action to reduce the budget deficit. And, they took out 12 trillion dollars, 100 billion dollars from the pockets of the public. And, after one year, the Government gave back more than that amount, more than double that amount, but once damage was done you can't fix it by the same amount of money. That is the one point, the first point.
Matt: I have a question for Professor Richardson. David, I'd like to focus a bit on the U.S.-Japanese relationship for a minute. And, of course, Japan's very important for the world economy and for the U.S. In the early 90's when these mistakes were made were U.S. policymakers trying to give advice to Japan, and if so, was the advice any good and was it followed?
Dave: The advice in the early 90's was very quiet and done very diplomatically and done in the spirit of cooperation through the normal G-7 bilateral processes. The more recent period has been one of somewhat more angrier advice and somewhat more unilateral advice which I think is well accepted among a minority of Japanese economists and policymakers and has gradually become the consensus so that today the short-run outlook for stabilization and for financial reorganization is quite good. Thanks, in part, to the way in which American and Japanese advice has actually gelled on a bail-out of banks that are in trouble which has unique Japanese features and which also has some of the desirable features of American bail-out systems as well. So, the advice ultimately has come to a consensus and it has increased over the 1990's from the U.S. to Japan in what I think ultimately will be judged a successful coordination.
Matt: Any more questions, comments from this side, or either side? Sourabh, you have a question?
Sourabh: Actually, I have, it's somewhere between a comment and a question and I'm looking in terms of the outlook, the future outlook for Japan. One of the areas we just talked about where there are problems are structural problems and Japan is making some sort - and the Japanese government has taken an initiative and companies, too, are taking an initiative finally and trying to make some amends, some changes in how they go about doing business. Now, this goes a little beyond economics and into politics also because what I wanted to point out is the Japanese government and LDP government is asking its own constituents which were primarily banks, big banks, construction firms, real estate, it is asking them to reform. It had very, very cozy ties with these people, now it's asking them to reform. I'm wondering like whether such, whether the nexus, the connection in between them has been so strong, whether in fact a clear, clean, fool-proof reform is in fact possible or not at all? Because I believe it will be difficult, the LDP Government is beholding to these interests as well as to rural interests. And this is, and this is well of the interests of maybe the urban consumers who would probably prefer greater deregulation is not something which really brings words to the LDP. I was wondering if Japan will be going for an election soon? If the democratic party, if at all, do you, do you all by any chance feel that it would be more urban-oriented government which would cater to urban interests more and would probably be more forceful in the sort of reforms that the Japanese politics and economics actually requires?
Masuro: Well your question about the, you pointed out the relationship between LDP and construction business people in the field of construction. It is time that LDP and LDP depends very much on such a constituency and I can't deny that there is a certain course of relation between them. However, I think it is a quite different thing that we should encourage the Government, advise the Government to increase public expenditures. Well, and this, many people say that the...efforts in increasing government expenses has been futile in reviving the economy, but I don't subscribe to this kind of interpretation. When the government took measures of a certain amount, it worked. It worked. And, so, I think we will, I mean the Japanese Government, should continue to spend more money on infrastructure with this request, of course. And, you mentioned the difference between urban and rural areas; and, it is true that in the past there has been so much emphasis on the infrastructure building in the rural areas in which made the LDPs very strong. But, nowadays, many people, even the politicians of LDP, have been emphasizing the importance of giving better services through urban population. And, many of the politicians, not only politicians, but even the politicians began to emphasize the necessity to concentrate more in the infrastructure building on the urban areas and also in information technology areas. About the political situation, I have not that many comments.
Leszek: Matt, we have a question on our side?
Matt: Good. Go ahead. Go Ahead.
Leszek: Laura, Go ahead.
Matt: Good question.
Dave: Well, I will try to give an answer. Washington, in the face of Robert Rubin, the Treasury Secretary, I think is quite encouraged by these reforms, and in the face of Larry Summers, also quite encouraged. But, you're right, Americans are quite impatient. And, quite impatient, especially with Japan because Japan is often so patient and deliberate in it's decision making. So, I anticipate considerably more pressure on Japan in the year to come as the American presidential election comes up. It will not be pressure as much in financial areas since the weaknesses will remain for another year. But, it will become pressure in the areas of exports. And, I believe that as the American trade deficit increases to nearly unprecedented levels in the year to come, Japan will feel a great deal of pressure in some of its export areas to control them as is obvious already in steel. But in other areas, as well, American politicians will bend to their own vices and put pressure on Japan to restrain its exports, especially, and not to try to grow out of its present recession. So, it will be continued pressure but in a different area, I believe. And my own sense is that the Japanese know how to deal with that kind of pressure very well; and, in recent times, they have understood that much of that pressure is for American political audiences, so they make suitable concessions and the American politicians go home and brag that they've had a victory. But, the Japanese continue at their own pace. The danger, I believe, is that if the Japanese trade balance turns too positive in terms of the rest of the world entirely, you will face the same kind of pressure from Europe as Europe slows down and perhaps from Latin America as Latin America slows down. And, that concerted world pressure on Japan is not a welcomed thing and you cannot deal with it quite as easily as you have dealt with American trade pressure in the past few years.
Matt: Joyce, we have one here.
Leszek: We have one here.
Matt: Leszek, let's take Joyce. Joyce is thinking about the exchange program and she has a question.
Joyce: I just wanted to know if you could talk a little bit about how Japan's current economic situation has affected its activities in South East Asian countries, particularly Indonesia, where Japan has heavy foreign direct investments.
Marumo: Well, the Japanese economic activities in South East Asia has been hard hit of course by what happened there on the result of the 1997 currency crisis. And the investments, direct investments, in those regions have declined sharply, of course, because of deflecting of the very large reduction of demands there. However, the Japanese companies in most of these countries in areas of South East Asia areas maintain, well some drawbacks, but are trying to maintain the activities there and many of them are trying to divert from domestic demands in those regions and to exports to other areas because the demand in those regions has depressed so much. Fortunately, well not in all areas, countries, but certain countries, there has been some signs of bottoming out and I expect that the situation will gradually get better in the future.
Leszek: Question please.
Marumo: Yes, I have a question or comments to Dr. Richardson. Previously he mentioned about the advices from the U.S. and for us to be quiet and quietly and gradually angrily, but finally having some kind of coordination. Well, on that I didn't comment, because, well, maybe, some Japanese may react angrily to the pressure, the so-called pressure from the U.S. Government side in particular. But, most of the advices, that is, solving the bad loans problem, quickly stimulated domestic demands. Those are advices which were right, and we Japanese in any way needed to do. So, I myself, personally have no, nothing against those advices at all. But now you said in a response to the question from our side, you said that there would be pressure from other figures that is external. Well, on this, this is an old issue and you mentioned that the U.S. current account of trade deficit with record historical is very high scale this year, maybe. Well, it's true, and deficits with Japan remain large, yes. But, this growing American trade deficit or current account deficit is due mostly to the very big shortage of domestic savings. Well the government deficit, budget deficit will reduce then your having a large budget surpluses, that is quite admirable, but on the other hand the private sector saving, particularly household savings has been going down while investment has been increasing, so it is only natural that your current account deficit will increase. Of course, there may be some, or certain problems in particular industries, for example iron and steel, but by and large on a macro basis, it is only natural that you have a larger deficit. And, of course, I'm not saying that Japan should have a large one, it is no problem at all that Japan having a large current account surpluses. But current account surpluses, which is very large, too large maybe, of course, but has begun to decline recently. And, so new type of pressure you are referring, well, I don't like myself very much. Thank you.
Matt: David
David: I think your analysis is completing correct. I agree with that in economic terms and the American problem is indeed one of inadequate household savings, though our business savings rate is much more positive and now our public savings rate has become more positive as well as you know. What concerns me is the political problem, not the economic analysis on which you and I agree. I'm concerned that the present American Congress and the present American Administration is looking for any excuse to bolster their election prospects. And it's a very convenient excuse to blame the deficit on Japan and on China in our case as well, and then to exert political pressure on you to do something about it. You and I know as economists that that will have very little impact on the deficit, but it will have very unsavory impacts on our political and diplomatic relations and make dealing with Asian security problems, much more difficult as well. That's my concern, it's the political pressure.
Leszek: I would like to introduce another dimension to this discussion and this is related to deregulation and structural reform. Because there is this view that comes from your side, the U.S. side, perhaps not Washington, but particularly amongst economists and academics in the U.S. that the current measures that the Government, the Japanese Government, has introduced are rather superficial and do not get to the root of the problem and as long as Japan is incapable of wide ranging and deep structural reform and deregulation, no improvement can be expected. I wonder to what extent Professor Richardson shares these views, or other academics in the United States, and to what extent would he think that deregulation and structural reform would be required in Japan in order to improve the situation.
Dave: I'd like to give a very brief answer and then ask my colleague, Professor Greaney, to give a more extensive answer. My very brief answer is that in long-term growth, the structural reforms to financial sectors in Japan are really very important. To brokerage and to shareholder rights and privileges to cross-share holding to competition policy to takeover legislation. I think that making those regulatory changes could make the difference of a half of percent to one percent in Japanese growth rates over the next decade or two decades. I do not think that regulatory reform in retailing or in services outside of the financial sector is that important to Japanese long-term growth prospects. But, I'm more interested in what my colleague has to say about these things, because this is more her area of expertise.
Matt: I'd like to hear more comments from students. We have about eight more minutes and let's get the students into this.
Leszek: Do you have a question? Matt, we have a question on our side.
Matt: Great.
Kaoru: Well, the discussion so far is like are you you just talk about the structure reform, but I don't think this is required now, because the problem now is partly, of course, because of the companies demand is decreasing, but partly because the other side, the consumer side, like the people, people's expectations for the future is really low. We are scared about the whole set of structure reform or like, uh, well, our system is totally changing. Then we are scared about the future and then now the serious problem is our people's low expectation which cause, which causes low demand. Then, in my opinion, the current policy should be taken now is to, well, the problem is how to increase the people's expectation. Then, I want to know from anybody is there any policy which can promote the people's expectations now.
Keo: Well, just a little comment to share, I mean rather than a question. People's confidence arrives from many factors and sources, and personally I see reform regulation as something that is necessary because it begins to provide...without any significant measures, effective measures for the long run. Then you may only just give some little money out, I can throw away the money without seeing any tangible results, because the expectation is that after the money's over then so what. So I think, I agree with Professor Marumo who mentioned the need to clean out the banking factors, for example the bad loan problems. Then other structural measures which needs to be taken in order to not only to involve the economy in the short run but also to relate downward for the future growth....
Masahiro: I'd like to relate to a point and the first point is that according to this morning's NIKKEI newspaper, it says that the proportion of individual investors in the stock market are now higher than foreign institutional investors in the Tokyo exchange market. I think this means that individual investors are having better confidence than before about Japanese economy. So now, I think, people's expectations, are getting better so far. And second, it is my just popular opinion that to boost up people's expectations I think that to reduce the consumption tax, we've needed periods such as one year or two years, maybe very efficient, because if the deduction of the fixed tax is lifted, maybe the consumer will hurry up to buy durable consumer goods or something. So I think it might be very efficient.
Laura: Yes, I actually want to say that companies are taking hard measures. They are cutting employment of staff. Hitachi, 10%, NEC 15,000 employees, etc. They are also implementing pension and retirement plans on basis of more market price yield more than the fixed yield. So these measures will inject into society a dynamic that the society did not have before. People will get used to, not to expect everything will be given by the company. Not everything will be fixed. Lifetime employment will be effected. So, maybe expectations of people will not change in the short-term and maybe more money, like, for example, here was said, tax cuts will be needed. But in the long term, the Japanese society is growing towards restructuring itself. The companies will work on a different basis. And, this is important, I believe.
Leszek: So you see there is some optimism on our side. Over to you, Matt.
Matt: Well I think this is a good way to end, and I think this has been really a wonderful experience, because I'm not an economist, but I learned a lot about both the Japanese economy and relations between Japan and the U.S. on economic matters. So I am really pleased we could do this and meet some of your faculty and students. And, I just hope we can do this again. And, of course, we will continue the exchange and deepen the exchange, and I'm really looking forward to working with you, even more than we've had in the past.
Leszek: Thank you Matt. On our side, we were very pleased to -- well, I wouldn't use the word pleased, but certainly we were interested by the comment made by Professor Richardson that we can expect another round of politically motivated trade conflict as the United States moves towards the election campaign. And, I suppose that this will have, as he did point out, an impact upon other issues. Not just bilateral U.S. Japan relations but other Asian security issues and that is a point that we would watch for the future. So, we thank you for that. And, thank you very much for taking part.
Matt: And, I'd like to thank you and all of the participants on this side, David and Teresa and students and Ken, we didn't hear from you, and Professor Marumo, I hope we can do this again.
Leszek: Certainly, let's do this again. Let's choose our themes. We have a wide-range of themes we can select. Let's discuss this.
Matt: Well, good morning to you and good night to us.
Marumo: Good night.
Leszek: Good night.
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