This is the second panel on Japan. This panel represents more of the more established figures in Japan. The Challenger is Paul Krugman, the moderator is the Chairman of Fuji-Xerox Yotaro Kobayashi, Professor Takatoshi Ito, Masayuki Matsushita the Vice Chairman of Matsushita Electric Industrials, Junichi Ujie, President and CEO of Nomura Holdings Inc., and Malcolm Williamson, President and CEO of Visa International.
This panel is focused primarily focused on more pressing issues than our panel and is more economics oriented.
Here are some notes.
Professor Ito presented a variety of short term and mid-long term scenarios.
Williamson "You can defy gravity for awhile, but eventually you fall. The longer you defy gravity, the harder your fall. This is what is happening to the Japanese banking system... Good bank mergers can reduce costs where 1+1=1.5. In Japan, bank mergers end up with 1+1=2.5. Banking is the most important issue. I've never seen a country come out of a recession with a bankrupt banking sector, which what I think is what Japan has."
Mr. Matsushita is saying that industries that were protected now suffer from weak management, elevated cost structure and dependency on government grants and subsidies. The elevated cost structure reduces the global competitiveness of these industries. Japan needs to supliment it's dwindling work force with skilled foreign workers and students. Do not limit internationalization to a select sectors.
Mr. Ujiie is saying that the Nikkei is hovering at the 8000 yen level, the level 20 years ago indicating the markets negative feeling about the probable scenaro. On the other hand, the policy makers seem to be following Ito-san's best case or base case scenarios. It is beomcing popular in academia and policy to talk about inflationary measures. Such initiatives must be accompanied by an increase in money supply. There must be regulatory reform along with monetary policy. For instance, tax reform.
Kobayashi-san is asking whether banks are taking actions in response to Takenaka's plan. Are the current signs of change in the banks a real sign that the Japanese economy is really moving towards reform, or are these changes real?
Professor Krugman says "no." Deflation is key. Deflation is not responding to conventional monetary policy and the analogy with the UK is not a very good one. They did not have a real deflationary problem. What kind of structural problems cause a deflationary tendency. Most problems cause inflation. The cause of a deflationary tendency. Non performing loans may not do much for the economy and it isn't clear that it isn't just a result of the deflation problem. People blame the banks for the fact that an increase in a monetary base does not result in increased output from banks. Well, if banks have increased money supply at 0 percent interest, there is a good reason just to keep in reserve. Regarding industry structural reform... "sometimes a kick in the rear helps gets us going, but sometimes it just hurts." It's unclear whether it will help the economy. He sees two upside and two downside scenarios. Upsides are new technology forms the basis for recovery or a radical expansionary policy. Down side is a full deflationary spiral or government defaut to which deflation plays a major role.
Kobayashi-san asks the panel for action ideas.
Ujiie agrees with Ghosn about execution being key. We have had a plan. Lets stop debating and implement.
Matsushita-san says that he doesn't think that structural reform will fix deflation, but that such reform will be necessary for companies to become competitive internationally which may indirectly help the economy, but that he is not a macro-economist. (Sounds like something I would say...)
Professor Ito thinks that the most important thing is the leadership of Prime Minister Koizumi who can coordinate all of the monetary policy.
Mr. Williamson agrees with Professor Ito and thinks that Professor Krugman sounds a bit defeatest. Leadership is very important. Korea and UK were both highly influenced by leadership in getting out of the crisis. It is a combination of factors, but the biggest thing is the change in psychology of the people who don't see the problem.
Question from the floor: Is there enough political will to give a leader the power to establish a political mandate which is necessary for political leadership.
Ujiie-san thinks that the people are prepared for the pain so the people have given the political mandate for structural reform. It is unclear exactly who takes the burden.
Krugman thinks that the structural may be exaggerating the pain that is required. It may not. Maybe it is just rolling printing presses is what is required, not blood and sweat. Maybe it's not leadership but just clear thinking that is required. Japan may stress the leadership and pain and make it much more complicated than you have to make it. Leaders will try, they will fail, there will be pain and we may just have another lost decade.
Question from the floor: Where did the "fire in the belly" go that used to be in Japan.
Professor Ito says that there is no sense of crisis on the streets.This isn't a generational change. It is the reflection of a more pessimistic view of the future. It's a reflection of macroeconomic pessimism and stagnation.
Question from floor to Professor Krugman: But the "new technology saves Japan" scenario. Will the banks fund it?
Professor Krugman says he thinks so. I commented that VC's in Japan are few and big companies are focused on developing very large business units that are core and innovation in the form of ventures is stifled. Ujiie-san mentioned that there are some attempts such as the angle tax law, but they are so poorly written that they don't work. Mr. Williamson thinks that it is an issue of a lack of VC's, not a banking problem.
Kobayashi-san is wrapping up by saying that the leadership of Koizumi is key in delivery of the package a reality. Commenting on our session... the system may seem broken now, but it used to work. The "iron triangle" is losing confidence and is maybe a source of political will to change. Maybe this enough to make the Prime Minister to listen to the micro side and maybe he can listen to Professor Ito and Krugman on them macro side.