December 12, 2001
The Times of India
Japan's Lost Decades
Tokyo: One of Japan’s most insightful economists, Makoto Itoh has written extensively on the world economic crisis and the problems of Japanese capitalism. in an interview with Siddharth Varadarajan at his office in Kokugakuin University, Tokyo, he explains the genesis of the current recession in Japan and Asia and argues that neither neoclassical nor Keynesian policies offer a way out of the impasse.
How would you characterise the present crisis of the Japanese economy?
The Japanese economy has been in continuous crisis since the collapse of the 1990 bubble. The 1990s were a ‘lost decade’ and the same situation is continuing. Many economists and policymakers believe the problems came from the financial difficulties faced by our banks. While there have been lots of bad loans which create a vicious cycle of deflation, it is the depressed situation of the masses of people which lies at the root of the current crisis. This is manifested in the downturn of consumption demand. This may be closely related to the process of rationalisation of Japanese industry, its hollowing out. Since the Meiji restoration in 1868, economic growth in Japan was pushed forward by secondary industry — manufacturing, construction — whereas for the first time in a peace period, we have been experiencing an absolute decline of the work force in this sector since 1993. That is why unemployment is at an historically high rate. Officially it is five per cent; but the real figure is more like 10 per cent if we count latent unemployment, irregular employment.
Today, virtually every employee is facing a cut in real wages, bonuses, overtime. many big companies where employees believed themselves to be very safe have been thrust into uncertainty under the process of restructuring and multinationalisation. there is pressure on pensions too. When so many people in Japan today are worried about their future, how can they spend more? And since consumption — which forms more than 60 per cent of Japanese GDP — is depressed, how can investment be revived?
What are some of the structural shifts that have taken place in Japanese capitalism which have accentuated this crisis?
In the process of the repeated economic crisis in japan since the 1970s, our big corporations strived to rationalise their financial and accounting positions. earlier, they used to be very big borrowers, using household savings to generate new plant and equipment. This was the German-Japanese type of industrial finance. The Anglo-American system of direct financing through the stock market was not favoured here. But since 1973, big Japanese corporations retreated from borrowing money. Since they did not have wide opportunities to invest, many big companies tended to be increasingly self-financing. As a result, big financial institutions like private banks lost their biggest borrowers. However, even though the rate of economic growth declined, the household savings rate continued to be high. Banks could not use that money in relation to growing firms. So they tended to use that money for risky, speculative operations on an international scale. They also started lending money to small and medium firms, real estate ventures etc. Finally, the government tended to borrow more money and accumulated huge debts.
And this trend continued till the early 1990s?
By the end of the 1980s, this process had brought about a change in the relative strengths of the three major actors in the Japanese economy:
• Big corporations were in a financially strong position. They became net lenders in the process of the continuing crisis of Japanese economy. They also issued joint stock and convertible bonds in the 1980s to absorb idle money.
• Working people and households suffered from stagnant or depressed income. More housewives started working to sustain family income.
• State finances started suffering because of cumulative debt. This raised further public fears about state support for pension, health and education. For example, university tuition fees were raised dramatically. By the end of the 1980s, the worsening health of the household sector infected the rest of the economy and the exchequer was also in crisis.
What is the scope for Keynesian-style economic policies in such a situation?
Today, Keynesian policies cannot revive the economy. despite repeated increases in government expenditure, the Japanese economy could not revive because government expenditure could not revive consumption for the mass of workers. The bulk of public expenditure went for construction, highways (almost 10 per cent of GDP). Japan’s rate of public expenditure is probably three times that of Germany’s, twice that of the US. but still it is not working.
Is this because of the peculiarities of the Japanese economy?
Most of the public expenditure went into construction — to buy capital-intensive, heavy construction machines and to buy land from landowners. In fact, I think more than 80 per cent of the increase in government expenditure was used to buy land. So it didn’t revive consumption, or employment. In my view, the government should engage in more consumption-oriented expenditure. If people are better supported by public services — baby care, for example — they can work longer, easier, can feel safe for their careers, education, health. At present, health, education etc cost too much. Do you know the fertility rate (the number of children a woman will bear in her lifetime) in Japan has come down from 2 to 1.34 in just one decade?
If this trend continues, the Japanese population will halve by the end of the 21st century. How can the economy revive in such a shrinking society?
I firmly believe that without giving the Japanese people a safe future, the Japanese economy cannot be revived. Quantitative government expenditure in the Keynesian style will not work. It has not worked and may even worsen the problem. What is required is a qualitative change in the composition of government expenditure — for local government to support the mass of people, to give them a safer sense of life.
What about the restructuring reforms launched by Prime Minister Koizumi?
Will the so-called ‘Koizumi shock’ help revive the Japanese economy? in 1997, Hashimoto failed to revive the economy and only worsened it by higher consumer taxes and a higher medical burden. this was a big shock. the Japanese economy, which had shown some slight signs of reviving, turned down again. of course, the asian downturn may also have been a factor. I’m worried about Koizumi’s restructuring. he is tightening expenditure and does not care about increasing unemployment, saying it is a necessary sacrifice for restructuring the economy on a sounder basis. I can’t understand how koizumi is still so popular. It could be because he attacks the traditional bureaucratic system. The majority of people in the private sector have suffered so much through restructuring while the bureaucracy remained untouched. many people are envious of that. there have been so many scandals about the bureaucracy and the mass media is saying the bureaucracy is the target of Koizumi reforms. however, his policy in the field of economic reforms is failing to revive the Japanese economy.