The Japanese economy and society still in crisis

In the wake of the so-called Lehman Shock two years ago, the world economy plunged into a massive contraction. Japanese real GDP growth also dropped by 12 - 13%-the largest decline since World War II-in the quarter ending December 31st in 2008 and the quarter ending March 31st in 2009. While the quarterly growth rates are currently positive, the economy remains in critical condition. I will list specific aspects of the crisis below.

First, young people are having a hard time getting a job. Only 80% of university graduates and 81.1% of high school graduates successfully found a job this spring. These figures are even lower than those in 2000, which is known as the employment ice age. What is worse, the job market is expected to shrink further still over the next year. Second, the significant plunge in tax revenues and expanding social security costs have led to an unprecedented fiscal deficit, endangering the current pension and medical systems. In addition, the aging population and downward trend in the birthrate have been further accelerated, and in turn, societal disparity and poverty have become further entrenched. International industrial competitiveness has also shown clear signs of decay, as epitomized by Toyota's recall problem.

The key to solving the crisis: increased national welfare or enhanced business vitality?

Amid this crisis, the Japanese people finally changed the administration through election last year-a first, both before and after World War II. The Democratic Party of Japan, the new ruling party, charted a course to increase national welfare and conserve the global environment by providing child-rearing benefits, free high school education, income indemnities to each farming household, an increased minimum wage, reinforced restrictions on labor dispatch services, and significant reductions in CO2 emissions, and more.

Critics, however, argue that these policies would increase the burden on businesses, weaken their international competitiveness, and encourage the transfer of production overseas-ultimately diminishing employment and decreasing national income in Japan. They propose that, on the contrary, sunshine policies favoring businesses are needed in order to stimulate economic growth. These critics hold that a ban on labor dispatching and an increased minimum wage should be tabled for now, in order to take the vital measure of lowering corporate taxes in order to create an environment that attracts foreign companies, which in turn vitalizes businesses with the resulting funds that are brought in ("Give Growth to Japan (1)," Nihon Keizai Shimbun Newspaper, December 7th, 2009). In short, their theory is that when businesses have ample profits, the wealth will trickle down to the nation as a whole.

I must say that this is a brazen argument, because it fails to consider or reckon with an important fact: During the period between 2002 and 2007-dubbed the economic recovery process that was never really felt-while many companies listed on the first section of the Tokyo Stock Exchange continued to enjoy all-time-record incomes, labor wages and individual consumption, in contrast, dropped, causing a slump in domestic demand, and contributing to the subsequent intractable economic contraction. The trickle-down of business profits is extremely unlikely, as nothing has changed in the corporate culture since that time.

The argument of the ruling party is not without merit, but as a policy proposal, it is not persuasive because it does not identify the root causes of the current social and economic crisis.

It is vital that we understand these root causes in order to fundamentally overcome the crisis.

The underlying causes of the crisis

In the monopolistic phase of capitalism, where a few giant companies hold power to dominate the market, the massive industrial firms usually hold intentional overcapacity to maintain their monopolistic prices as well as to prevent outsiders from entering the market, and they keep spare capacity in order to respond immediately to sudden expansion of the market. These factors-combined with the unintentional overcapacity that results from the market contraction-form structural overcapacity, leading to the tendency of generating excessive real capital. Correspondingly, a large number of people comprising a relatively excessive population-unemployed people and irregular workers-keep piling up at the bottom of the social strata. Further, the huge profits accumulated by the few giant companies become idle and form excessive monetary capital, as the funds have nowhere to be invested due to the overall reduction in incentives for investment.

This situation, unique to the monopolistic phase, is called the tendency toward systematic surpluses of capital and labor. This stagnation is the primary characteristic of modern capitalism and the root cause of the crisis.

The mechanism of the emergence of the crisis

The world economic crisis that broke out in 2008 was fermented and exploded through the following mechanism. At the preliminary stage of the crisis, the excessive monetary capital that had been formed through the tendency toward systematic surpluses of capital and labor-hereafter called money-began moving independently under the liberalization and internationalization of finance that had been advancing since the 1980s. Money's unique behavior resulted in the following: First, it generated high-risk and high-return financial speculation opportunities one after another, increasing the risk of the worldwide chain reaction of financial bankruptcy.

Second, various financial products that had been created as investment targets-epitomized by subprime loans-formed consumer demand that was fictitious, in the sense that it was not backed by any evidence of actual ability to repay. While the consumer demand brought about the world economic boom in the early 2000s, it also induced and drove the excessive accumulation of real capital.

Third, the money flowed into the purchase of shares in promising businesses, and maximum shareholder returns were claimed from these businesses-a situation called corporate capitalism. As a result, industrial firms strengthened their production base further and promoted cost-cutting by downsizing permanent employees, increasing irregular employees, and reducing wages, in order to maximize their profits. These measures in turn severely weakened the individual consumption base. In other words, the development of corporate capitalism profoundly deepened the contradiction between production and consumption that is intrinsic to capitalism. This contradiction is also described as the inconsistency between unlimited expansions of production-defined as factor α-and the limited consumption of the working public-defined as factor β.

Under this critical state in the foundation of the real economy, the situation called the world depression 2008 was triggered by the financial collapse and the subsequent financial crisis that emerged in the form of the subprime loan problem. It must therefore not be regarded simply as something like a natural disaster.

How should we address the social and economic crisis?

It should be obvious from the discussion above what is required to fundamentally overcome the current social and economic crisis. First, new international financial regulatory systems must be established to control the speculative movement of excessive monetary capital that has been generated from the systematic surpluses of capital and labor and isolated from the real economy. Guidance is also vital to ensure that the isolated monetary capital is used for valuable public purposes.

Second, the contradiction between production and consumption must be overcome by taking two measures in tandem. One is that various industrial policies should be employed in order to direct factor α toward ends that benefits humanity. The other is that new employment and wage systems should be established to mitigate factor β and to strengthen the worker consumption base. Moreover, the safety net should be expanded and improved in order to eliminate fears about the future. Unfortunately, however, I will have to wait for another opportunity to discuss my specific recommendations about these measures.