Japan's government policy mix is a strategy for failed economic growth. The Ministry of Finance is about to raise taxes sharply. It is dragging its feet on deregulating insurance. And it is talking the yen down, making imports more costly. All three hurt Japanese consumers. The same bureaucrats who engineered Japan's five-year recession are trotting out a low-yen, export-led strategy that, we think, courts recession.
Consumers are facing not one but three new tax hikes. There is a two-percentage-point increase in the national sales tax, to 5%, in April. There is a 0.85% increase in Social Security contributions in October and an $18 billion annual income-tax rebate that will expire in December. Together, they will reduce real disposable income by 2.1%.
The MOF believes that the 38% decline in the yen since its high of 2 1/2 years ago will put enough profits into the corporate coffers to offset lower consumer spending with new investments and higher wages. It has worked in the past. But not this time. Japanese companies are pouring virtually all their investment dollars into Thailand, China, and the U.S. And it is unlikely that they will raise the cost of doing business at home by boosting wages. The MOF strategy will hurt consumers. Its decision to backtrack on previous 1994 commitments to open up Japan's closed insurance to foreign competitors will do the same.
We suggest that Prime Minister Ryutaro Hashimoto openly run against the powerful bureaucrats in the upcoming national elections on Oct. 20. Cut taxes, don't raise them, and save money by reducing the regulatory bureaucracy that dominates Japan. Take power away from the MOF. It's time for Japan to become a true democracy.