Commentary: Japan's Weird Coupon Scheme

My Japanese in-laws, neighbors, and barber have a lot to talk about these days. There was the dark-horse team from Okinawa that entranced the entire baseball-mad country by becoming the first from its prefecture to win the 71-year-old national high school invitational tournament. An attempted incursion into Japanese waters by two North Korean spy ships also grabbed headlines. Yet Topic No. 1 has been Tokyo's weird attempt to stimulate consumption and snap Japan out of recession by issuing the equivalent of gift certificates.

It certainly is one of the more bizarre efforts to boost an advanced economy in memory. It was hatched amid last July's Upper House election, when the Buddhist-led New Komei party vowed to refund the money voters forfeited when Japan hiked its sales tax in 1997 from 3% to 5%. After the election, New Komei followed up by proposing the coupon program. All of Japan's 3,255 cities, towns, and villages could issue coupons, usable only within their jurisdictions. Consumers could use the certificates to buy anything from clothes to beer and haircuts.

The ruling Liberal Democratic Party embraced the idea. The LDP, which had lost control of the Upper House, needed New Komei as an ally. It also saw the plan as a way to help small businesses, a crucial LDP support base. And by issuing coupons instead of cash, officials figured, consumers couldn't simply stuff the money into bank accounts.

LOVE HOTELS. So in late January, local governments began issuing certificates worth $165 to families with children 15 or younger and to senior citizens. Each government can designate where the coupons can be used. For example, some allow brothels and so-called love hotels to accept them. So far, at least 35 million Japanese have received coupons. As of mid-February, they had spent $2.5 billion of the $6 billion budgeted for the program.

The economic merits are dubious. The amount committed to the plan equals just 0.13% of gross domestic product, notes Peter J. Morgan, senior economist at HSBC James Capel Japan Ltd. "There's no way this could have any impact even if all the coupons were spent," he says. The Nikko Research Center figures the program will add 0.06% at most to GDP. Cynics suspect consumers will use the coupons on necessities and save the cash they otherwise would have spent.

Certainly, the government could find better uses for $6 billion. Kathy Matsui, chief strategist at Goldman Sachs (Japan) Ltd., thinks that instead of going for a short-term lift, Japan should use the money to prop up its weak social safety net at a time when companies need to slash payrolls. "Early retirement plans cost a lot of money," she says. "Japan should put programs in place to allow for corporate restructuring."

The plan's sponsors disagree. They point to various discount and promotional events that local merchant associations are using to hype the scheme. "This kind of thing wouldn't have happened with a simple tax cut," argues Toshiaki Kitazato, the Home Affairs Ministry's policy planning director. "In our view, this policy has had a bigger impact than earlier tax deductions, which people tended to save." Adds Katsuyuki Hikasa, an influential New Komei member of the Upper House: "A few years from now, people will be reading about this in history books."

Ordinary Japanese aren't so sure. My brother-in-law, an administrator for a large seafood distributor, received $165 worth of coupons because he has a teenage son. He gave half to his 14-year-old, on condition he use the coupons only for school materials, and the other half to his wife for household expenses.

Nor is it clear that the program is really helping small retailers. "We're still checking this out," says Satoshi Ida, executive director of the National Federation of Societies of Commerce & Industry, Japan's leading small business group. Ida says the LDP consulted him on the idea and that he told them to go ahead if the government has the money.

But it doesn't. The $6 billion will likely be financed with government bonds. That will add to a crushing public sector debt of $5 trillion. Whether the program is refiring the economy will only be known when the data come out in a few months. If the numbers are weak, the scheme will go down as yet another lame attempt to fix Japan's economic problems with smoke and mirrors.

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