Japan Has to Help Its Consumers

To hear most economists tell it, Japan will soon muddle through selection of yet another Prime Minister, have yet another national election, and undertake yet another round of policies designed to turn around its chronically weak economy. Not much will change. Most of the blame will go to the failure of banks to write off their bad debts and the unwillingness of corporations to restructure.

This conventional wisdom is only partly true. Bank reorganization has made tremendous progress, and a good chunk of Japan Inc. has already restructured to become more efficient. Japan's real economic problem is a comatose consumer. Getting the Japanese to buy may require unorthodox measures, from massive tax cuts to inflationary increases in the money supply. Neither appears politically feasible at the moment but, perhaps, inevitable in the end.

Economists complain that the Japanese just save and don't spend. But a look at the balance sheets of most families will find that the savings really aren't there. Deflation in land and property prices have left one-third of all mortgaged Japanese homes with a negative net equity. One-fifth of all household savings are in life insurance policies, but insurance companies are increasingly going bust, paying policyholders just pennies on their policies. Income is also declining in most households. Middle-aged male breadwinners are threatened by corporations downsizing. The lucky ones get lower pay but often have to move to other cities away from their families. The unlucky ones get fired with modest severance packages. Pensions for all workers are being cut. The young find big corporations not hiring that many people, and the high-tech sector remains too small to absorb them all.

With savings threatened, income declining, and the future looking grim, Japanese families are not about to spend in a big way. There are two solutions: massively cut taxes on urban consumers to increase their spending power or monetize the entire economy to stop deflation and give people incentives to buy. Distasteful as it might appear, a 2% inflation rate, instead of the current 2% deflation rate, might work.

But neither solution is possible as long as the Liberal Democratic Party is in power. Even though it has lost nearly every major election in cities over 2 million people in recent years, the LDP still governs because of rural gerrymandering. Instead of cutting taxes for the urban majority, the LDP prefers to keep taxes high and transfer trillions of dollars to its base of rural voters. Far better for Japan to cut taxes sharply for urban consumers. Failing that, experimenting with controlled monetization might be worth the risk.

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