Now's the time to heal Japan's economy

The Yomiuri Shimbun, Asia News Network, Tokyo

The massive weight of the slump in the worldwide information technology industry and the economic slowdown in the wake of the Sept. 11 terrorist attacks on the United States are bearing down on Japan, which is suffering a serious recession. An uninterrupted fall in prices has only exacerbated the situation, driving the nation's economy to the brink of a deflationary spiral.

On Friday, the government dimmed its economic growth forecast for fiscal 2001 to a negative 0.9 percent in real terms and a negative 2.3 percent in nominal terms. These figures are in stark contrast with the mildly optimistic forecast the government produced in January. That projection had the economy growing a possible 1.7 percent in real terms and 1 percent in nominal terms during fiscal 2001.

The projected negative growth in real terms would be the first in three years. Meanwhile, the economy would contract in nominal terms for a fourth straight year, meaning that the ongoing economic decline would drag on longer than duration of the financial panic that struck the nation in the early 1930s.

On Friday, the Cabinet adopted a supplementary budget for fiscal 2001. The budget totals somewhat less than 3 trillion yen, including only about 500 billion yen in outlays for projects aimed at improving the nation's social infrastructure. Given this, the supplementary budget seems unlikely to encourage the economy much during the current fiscal year.

As things stand today, the economy is bound to contract at an accelerated pace, raising concerns that Japan's ravaged economy could trigger a global financial panic. If the bottom falls out of the current economy, the government's structural reform plan is certain to be thwarted.

We think Prime Minister Junichiro Koizumi should snap out of his half-hearted approach to recovery and focus his efforts on improving the economy. Effective measures should be devised immediately to bail the nation out of its deflationary crisis.

The government should draft a second supplementary budget for fiscal 2001 that incorporates projects designed to help implement its structural reform policies earlier than initially planned. Centerpiece programs could well aim to promote urban renewal, provide better nursing services for the elderly, build more day- care centers and encourage medical research. The supplementary budget should complement the regular fiscal 2002 budget, thus pulling together a "15-month budget."

Given the changes in the global economy due to the terrorist attacks, Koizumi has no reason to be bound by his own pledge to limit the issuance of government bonds in fiscal 2001 to less than 30 trillion yen.

The government should also devise wise and pragmatic ways to raise funds to service government bonds if it is concerned that issuing more bonds could raise long-term interest rates. For example, it is advisable to issue government bonds whose debt- servicing costs would be covered by special financial resources.

Now is the time for Koizumi to demonstrate the bold and flexible demeanor of which he boasts by reversing his thinking and policies.

Such moves should be complemented by a dramatic relaxation of taxes on profits from stock and land transactions. To do so, the government should lower taxes on profits from stock sales to nothing, or at least keep them under 10 percent. Furthermore, the government should continue allowing market investors to pay their dues under a formula in which income taxes in this category are proportionate to the amount of shares an investor has sold.

The government also should consider shedding a land and housing tax system created during the bubble economy.

Authorities may find themselves obliged to implement additional measures to end the current deflationary crisis. In this connection, the Bank of Japan should buy more long-term government bonds. The central bank also should not hesitate to introduce an inflation target.

There is an urgent need to write off nonperforming loans held by financial institutions once and for all. The government should work to ensure that Resolution and Collection Corporation buys more bad loans at the market price. Bank of Japan loans could help along progress in this regard.

The outlook for the nominal gross domestic product in fiscal 2001 has been lowered to about 499 trillion yen, falling below 500 trillion yen for the first time in seven years. The government must change its economic policy now, to prevent the advent of a recession that could rival a decade-long slump.