No effective economic policy choice offered by Koizumi

Susumu Saito, Director, Trilateral Institute Inc. (Sankyoku Keizai Kenkyusho), The Asahi Shimbun, Tokyo

Prime Minister Junichiro Koizumi recently hinted he will dissolve the Lower House and call a snap election in November, as had been widely anticipated.

What effective choices of economic policy have various political camps, from Koizumi himself to anti-Koizumi forces within the ruling Liberal Democratic Party and the opposition Minshuto (Democratic Party of Japan), offered the public?

Opinion polls indicate about two-thirds of Japanese expect a fiscal policy that will lead to a quick economic recovery. Many Japanese, it seems, interpret Koizumi's "structural reforms" platform as identical to economic recovery.

But more than two years have passed since Koizumi first used the slogan, and most Japanese are now beginning to demand the "fruit" of their patience amid sluggish business conditions.

Most media do little more than pass on information from government news releases that usually portray as rosy a short- term economic picture as possible.

A sobering figure from the Japanese government, however, is that the nation's gross domestic product at current prices (nominal GDP) has leveled out at around 500 trillion yen at an annual rate for the past seven quarters since fall 2001.

What appears to be robust real economic growth, or the growth of gross domestic product at 1995 constant prices (real GDP), is nothing but the reversed image of on-going deflation: Flat nominal GDP divided by falling price measures produces rising real GDP.

Nominal GDP has shrunk 5.6 percent over the past six and a half years, and employees' wages and salaries also fell, posting a 4.5-percent drop from the third quarter of 1997 to the second quarter of 2003.

The working class, or those with debts such as mortgaged homes, have been particularly hard hit by plunging income levels and falling real-estate prices.

On the other hand, deflation has been a boon for retirees who have fixed incomes such as pensions. It is no wonder Koizumi's support rate is high among retirees, especially women, who traditionally control the purse strings. No doubt, they feel they are better off with deflation.

But things are not as they seem.

Policy documents released so far by opposition Minshuto and ideas propounded under the ongoing campaign for the LDP presidential election this weekend offer a disappointing outlook for nominal economic growth and deflation.

Koizumi has mentioned he aims to raise nominal economic growth to 2 percent by fiscal 2006, but he did not include this goal in his official platform. Put simply, Koizumi argues staying the course, but he offers no concrete prescription for raising nominal economic growth.

Meanwhile, the three anti-Koizumi candidates regarded as advocating expansionary fiscal policy to raise nominal economic growth are not as aggressive as first thought: Former Foreign Minister Masahiko Komura has offered neither a numerical target for nominal economic growth nor a concrete budget plan to flesh out his stance; former Transport Minister Takao Fujii set only a modest target of raising nominal economic growth to 3 percent within three years; and former Construction Minister Shizuka Kamei, who is regarded as taking an aggressive stance to combating deflation, has a similarly modest target of raising nominal economic growth to 2 or 3 percent within the same period.

Fujii and Kamei both propose a supplementary budget of 10 trillion yen, or about 2 percent of nominal GDP. But they have offered no concrete fiscal plan.

The problem is this: Achieving a nominal economic growth of only 2 or 3 percent in around three years would have no effect on significantly improving the budgetary balance sheet.

Koizumi talks about restoring the budget's primary balance by the early 2010s. But who will be responsible for this policy objective in such a distant future?

Minshuto also lacks clear-cut policies for combating deflation.

Minshuto and other opposition parties have so far demanded only a reshuffle of the fiscal 2003 budget, but not suggested changing the sum of overall outlays.

The proposed budget reshuffle may be significant for prospective supporters of the opposition parties, but falls way short of mitigating and reversing deflationary pressure on the economy.

What's more, besides this proposal Minshuto has not offered a single concrete budget proposal worth commenting on. It is hard to believe the party will have sufficient time to inform the public of its concrete economic policy platform if an election is indeed held in November. Minshuto's naive belief

Worse, Minshuto still appears to naively believe that thoroughly executing the current financial restructuring plan- following their 1998 proposal-will work to combat deflation.

In fact, the opposite is true. The rescue of the Tokyo stock market since May was, ironically, thanks to the de facto cancellation of the current financial restructuring plan, coupled with the massive supply of liquidity in yen. This resulted from the Japanese currency authorities' massive intervention in the foreign exchange market to buy U.S. dollars and sell yen.

In summary, Koizumi and anti-Koizumi candidates in the LDP presidential election are lukewarm about combating deflation. So is opposition Minshuto.

The public will be deprived of a choice between deflationary and anti-deflationary economic policy if a snap election really is called in November.

Without high nominal economic growth, even people who are content with the deflationary situation will face the sharply accelerating deterioration of the budgetary situation, which will likely force cuts in pension benefits, over the next few years.

Central and local government budget deficits are expected to exceed 50 trillion yen in fiscal 2003, or roughly 10 percent of nominal GDP. Contrary to popular belief, the ratio of net public debt to nominal GDP has risen sharply since fiscal 1997, when fiscal austerity triggered contracting nominal GDP, and has continued to increase at an accelerated rate for the past two years under Koizumi: From 24.0 percent in fiscal 1996, to 53.4 percent in fiscal 2000 and 69.7 percent in fiscal 2002.

With nominal GDP likely to remain leveled out for the next three years, the ratio will be almost 100 percent, leaving fiscal authorities who designed the budgetary plan backed into a corner. The current complacency regarding deflation will cost the public dearly in the near future.