I'm still working on my Blueprint for Japan 2020 for Davos and focusing on trying to figure out what we need to do to "fix" Japan. I'm digging around trying to define the problem.

The biggest problem is the recession, but it's just one piece. It's also a very visible piece. There are other less visible indicators such as the lack of entrepreneurs, high suicide rates, mental health problems, lack of political participating of the people, lack of diversity in politics, huge media companies with little diversity, 4% of the universities providing over 30% of the CEO's for public companies, the medical scandals, a judiciary that is unable to enforce the constitution, the difficulty in filing claims against the government and corruption at many levels.

Reading Hiroo Yamagata's interesting proposal (from 1998) to increase VAT to simulate inflation, based on Paul Krugman's proposal in Japan's Trip. He says:

Hiroo Yamagata
But wait! You've been reading the papers, and they say that structural reform and bank clean-ups are essential for Japan's recovery! What about those? Well, those are definitely good things and should be pursued in their own right. But neither have too much to do with the recession.

I think he has a point, but I think that's not a reason why we shouldn't continue to push structural reform. Although reforms don't have as much of a direct effect on the macro-economy as people say per Hiroo's argument, it's difficult to have a healthy economy without entrepreneurs, a healthy, open market, transparency and a democracy that people trust. I think that it is much easier to cause reform during a down market because people are willing to bite the bullet and change in order to survive, power-structures are more fragile and susceptible to change and people are in pain and possibly willing to become more politically active. Now there are a lot of "maybe's and might's" here but I think that when people are happy shopping and getting paid for doing almost nothing, it's pretty hard to stage a revolution. I guess one might argue that we don't need a revolution in Japan, but I think that without one, we won't be able to change into a truly functional democracy. Without a democracy, it is unlikely that Japan can be a global player in the 21st century. Again, a pretty bold claim... So now I think I've identified my homework.

Is there really a problem with Japan or are people just upset because of the recession?
IF there is a problem, how do you cause change? (You need power to change and you don't have real power in Japan unless you are on the inside and therefore unlikely to change.)
Will structural reforms, in the long run, help the economy?

I guess one of the short-term questions that I have to answer is whether we should talk about the economy and involve a bunch of economists in the debate or focus on democracy and deal with the law professors and politicians. ;-)

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I should (rather proudly) point out that my "increase the VAT" (or to put it more precisely, THREATEN to increas the VAT) proposal was firmly endorsed by Joseph "shoeless" Stiglitz last year, when in an interview he proposed to lower the VAT for a limited time (so that people will be threatened to spend during that period).

Structural reform is a good thing in the long run, and it should be pursued, but the problem is, in the short run, it hurts the economy. I understand your concern that unless people are pushed into a tight corner, they won't have any incentive to change. But then, it's always the little people who gets hit the hardest by various structural changes.

Oh, and don't bother to call in the economists. The concensus is already there. Most major economists (Krugman, Stiglitz, Akerlof, Bernanke, Gordon, Ito...) of the world agree that Japan should aim for mild inflation. They also agree that structural reform is nice, but not the issue at hand for the Japanese economy. The only ones against it are those within the Japanese establishment.

However, if you think there is an opportunity to change the system using the difficult economic situation to your advantage, then by all means go for it. As long as you don't worsen the situation with your plans, that's fine. In other words, if you say "let's change the system while things are shakey," that's fine. Where as if you say "let's MAKE (or KEEP) things shakey so that the system can change," I'm all aginst it.

Also, YOUR structural reform is probably very different from THEIR structural reform (or what I referred to as structural reform in that article), so watch out. People often mean something completely different using the same word...

Very interesting blog. First time visitor. We will return.

Thank you for your comments Hiroo. Yes. Reform means different things to different people. Glad the economists are agreeing with each other. I understand your point about not keeping it shakey for the purpose of reform, but I think that reform costs money and some people will feel that they can't afford reform. I think that in order to make it real reform and not just reform that hurts the little guys, we need to cut down to the bone and break down some of the old power structures that prop up the big guys. I think this will shake up the system temporarily, but it will only be chasing out some of the inflated valuations and inefficiencies and I believe that if we can create a healthy market, the rebound should be quick. I think that more than anything a real cleanup of some of the bad power structures will dramatically increase confidence and should help in the long run.

You guys forget the words of international movie star, crusader, mother, fitness guru and economic commentator Jane Fonda:

"no pain, no gain"

There is no way you are going to fix the macroeconomic problems of Japan just by goofing around with VAT and the interest rate. It's fiddling while Rome is burning.

Any reform is going to involve pain and economic contraction. You might as well face it and learn to smile about it. It will cause unemployment, crime and bitterness. Things will get worse before they will get better. The longer you leave it, the harder the bad times will be.

But it will be hard to bring about serious structural change until Japanese people begin to feel pain.

I was in Tokyo last month for the first time ever. If I had believed the economic commentaries, I would have been expecting to see people jumping into the sea. But the reality is that people in Japan are feeling very little of the pain that usually precedes reform. There's no social turmoil, mass unemployment, crime, problems with immigration.

At the same time, I can see that there is a serious lack of efficiency in the economy. I mean, USD 25 to get a bus from the airport to the city centre. It's a very nice bus, but c'mon, there has to be a less expensive way.

I can't imagine that even a major adjustment in the VAT rates would provoke any major behaviour change among Japanese. The idea for reducing VAT temporarily to stimulate spending is unlikely to fool the canny Japanese consumer. The VAT rate is pretty low anyway, and the stereotype of the Japanese among marketers is that they don't like to buy in bulk or to stockpile. All that would happen would be that people would either save more or change their spending profile to even more expensive goods. That's unlikely to do much good other than maybe prompting a seventies-style inflationary spiral.

My hunch about what _is_ likely to stimulate change in Japan, which will ultimately lead to growth, is a change in Japan's relationship with the rest of the world as a result of an economic factor.

The economic factor that will probably cause the upset will be the exchange rate. If/when the Yen slides further, and it's not ridiculous to suggest that it might slide another 20 percent against the Euro, and Japanese purchasing power decreases, there will be an increased external focus. This will bring new people, new experiences, and new ways of looking at things.

Just my JPY 2.

I go back Japan several times a year. I see many problems, which are affecting Japanese people and economy badly. Japanese laws, regulations, and traditions have been created and practiced to protect big government and big institutions. Tax systems are outrageously anti people. Financial systems are outrageouly anti people/consumers and pro banks. I have been personally affected by unfair Japanese tax laws and bank traditions in several occations. Japanese banks are like "Kanekashi" in Edo era. I do not understand why many bright Japanese people miss such obvious problems.

Two short points:

Do not ask economists or professors for defining and solving the problems. Do not form a committee consiting of company presidents or experts.
Ask and challenge average people and those who are suffering.

Reforms in certain ares will help the economy immediately. Find low hanging fruits. Do not come up excuses.

I found that these comments by Gregory Clark (As published
in the Japan Times) on Japan's "lack of consumer spending" really get to
the bottom of this current economic debate. Imagine, the average savings
account per capita in Japan is about $150,000 usd..!! Good Luck Joi.. ;-)



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