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Shifting Gears in Japan

Late last year Prime Minister Yasuhiro Nakasone appointed a private commission to recommend objectives for Japan’s future economic growth in the light of rising international irritation with some of Japan’s current economic practices. Now, in a report short on specifics but far-reaching in its philosophical implications, the commission has proposed nothing less than what it calls a “historical transformation” of Japanese economic policies. It is indeed that, or at least it could be if its goals were adopted. Nakasone has pledged that they will be. But it is already clear that he or his successors are going to have to overcome formidable bureaucratic and political opposition to make good on that promise.

At the core of the panel’s proposals is the idea, long advanced by some foreign critics, that Japan must begin to shift from an economy based on ever-rising export growth to an economy fueled by increasing domestic demand. How should that be accomplished? By allowing Japanese to consume more and by getting them to save less. The generous tax incentives that now promote such a high rate of private savings ought to be reconsidered. To provide more leisure time, and the spending that usually goes with it, the work week ought to be shortened from an average six days to five. Tax cuts and wage increases ought to be provided, again to encourage greater consumption. Home buyers should be given liberalized tax breaks, imports should be promoted, Japan’s capital markets ought to be liberalized to invite more foreign participation.

Interestingly, much of this reflects concerns that are the direct opposite of those of many American economists, who worry about a U.S. savings rate that they consider far too low and about a growth in private debt that they see as dangerously high. But the concerns of Nakasone and his panel are proper. Japan has become an international economic giant, but most Japanese complain with good reason that they do not personally feel very well off.

Housing in Japan’s major population centers tends to be woefully cramped. Amenities are often absent. Prices of most products--even staples like rice--tend be high, while choices are often limited. Some of the shortcomings that the Japanese live with are largely unavoidable. Put 120 million people into a largely mountainous country smaller than California, and the sky-high price of usable land will inevitably impose limits on housing availability and space. But the Japanese are by no means wholly the prisoners of their population density and geography. Things can be made better in the domestic economy. Nakasone insists that they must be.

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A major goad is Japan’s by-now-embarrassing trade and current-account surpluses. Last year Japan’s bilateral trade surplus with the United States came to just under $50 billion--nearly three times what it was in 1982. This year, thanks in part to cheaper oil prices, Japan’s current-account surplus with the rest of the world could reach $65 billion. Numbers like these raise the volume from the chorus of those--and they are not only in the United States--who call for domestic protection against Japanese imports.

Nakasone understands the imperatives for change. To get change he must rally the political support needed to overcome the resistance of the numerous special-interest groups that benefit from the economic status quo. And he must force a government bureaucracy that is notoriously adept at blocking and diluting major economic reforms to do his bidding.

He may not have much time; his term as prime minister will expire later this year. His advisory commission did not give him a specific action program or timetable--only an outline of where the economy ought to be heading in coming years. This has led to criticism in Japan as well as abroad that the “historical transformation” may in the end turn out to be only another cosmetic stall in response to external pressures for change. Maybe. Or maybe the stage is being set for what will truly be a historic economic restructuring of the Japanese economy.


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