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Democratic Party: Get Back to the Basics of Economic Policy

Masazumi Wakatabe
Professor, School of Political Science and Economics, Waseda University

Dear Yukio Hatoyama, Prime Minister of Japan:

I realize that you must be increasingly busy with the change of the administration, so I will come right to the point. Among the people, there is great hope that in terms of economic management, the Democratic Party will do things differently than the Liberal Democratic Party (LDP) did, but there is also unease that you may do things that are way off base as well.

The question is what to do in order to allay these public fears. I believe that the root of the economic policy problems that the LDP experienced was in their deviation from the fundamentals of economic policy, and this is why I urge the Democratic Party to get back to the basics of economic policy.

Broadly speaking, there are three objectives of economic policy, which are:

1) Dealing effectively with economic downturns (stabilization)
2) Maintaining economic growth (streamlining)
3) Ensuring that all citizens can lead a decent life (redistribution of income)

Each of these three objectives is fundamental and important, and at the same time, there are occasions when working toward one objective seems to preclude working toward another. In this way, balance is vital. It is fair to say that, no matter what kind of administration, economic policy involves striving to achieve goals by maintaining a proper balance and effectively prioritizing these three economic policy objectives. More than that, it is fair to say that the previous LDP administrations failed to maintain the proper balance and effectively prioritize these three objectives in their economic management.

There is no need to explain number one, stabilization, to Japanese people. Japanese society was torn apart by the deflationary downturn of the nineties, and many among us met with truly hard times. After that came the recent once-in-a-century crisis. While we want to believe that the worst is past, we have not yet returned to pre-crisis levels, and there is no denying the potential for things to get even worse. There are particularly grave elements in the way Japan would decline as compared with other countries. Soon it will be winter, unemployment will increase, and many will again suffer hard times. This situation calls for urgent measures. Increasing public works projects-as the LDP did-however, would only provide a quick fix, and various measures promoting industry are no substitute for stabilization.

Number two, streamlining, involves maintaining the highest possible course for economic growth. There are both proponents and opponents of economic growth in Japan today. Economic growth is not everything, of course, but it is indispensable in resolving the problems of poverty and the environment, and in fact, global economic growth continued from the nineties until the recent economic crisis. There is no reason that Japan alone cannot grow.

Number three, redistribution of income, can be divided into two parts: countermeasures for poverty, and countermeasures for the disparity between rich and poor. We need to do our utmost to eradicate poverty, and we must keep the disparity between rich and poor within a socially acceptable range. A recent survey revealed an increase in the number of poor people more than an increase in the number of people in the high-income class, and this is a serious problem.

The path to so called structural reforms placed too much emphasis on number two, streamlining, and not enough on numbers one and three, stabilization and redistribution of income. Of course, when stabilization and redistribution of income are going well, streamlining is extremely important. We can surmise the reasons for the distortion that resulted from such misplaced emphasis by considering the lessons learned through the successful experience of the Reagan/Thatcher years. When Reagan and Thatcher came on the scene, they faced both high levels of inflation and a stagnant economy. They implemented austere macroeconomic policies to control the inflation and enhanced supply side economics through means such as easing regulations. These proved to be the correct complement of policies which brought a positive growth cycle. These Reagan/Thatcheresque policies were not, however, what was needed during a deflationary economic downturn.

I would like to discuss these issues a bit more specifically.

1) Policy coordination with the Bank of Japan-the central bank of Japan-is indispensable toward stabilization. In terms of stabilization, deflation in Japan has been a problem in the past and it will remain a problem in the future because the Bank of Japan views stabilizing the cost of living as an important objective. Which reminds me, I recently heard that the new administration will dissolve the Council on Economic and Fiscal Policy. Unfortunately, this means that the occasion for regular talks among top government officials and the Governor of the Bank of Japan will be lost. In the US, the President meets for a policy luncheon with the Chairman of the Federal Reserve Bank (FRB)-the central bank of the US-once a week, and regular meetings such as these, at a minimum, are required in Japan as well. Another alternative worth considering is establishing a governmental/Bank of Japan consultative body using the National Strategy Bureau as Secretariat.

2) Streamlining may not be well received under current conditions, with the strong backlash to the course of structural reforms. Prime Minister Hatoyama, however, has already pledged to "reduce global warming gas emissions to 25% of 1990 levels by the year 2020." Supposing we could achieve this goal, it would not only require every effort in reducing gas emissions, but technological advances would be indispensable as well. These technological advances can only be achieved through a robust private economy. These advances are not the result of someone giving an order or implementing regulations, but rather they are the product of the free and vigorous creativity that is fundamental to human development.

3) In terms of redistribution of income, the Democratic Party has no shortage of ideas. They would do well first of all, however, to conduct a statistical survey to determine the actual conditions of poverty in Japan. I am preaching to the choir in saying this to you with your background in the sciences, Prime Minister Hatoyama, but: Where there is no solid data, there is no basis for sound policy. Unfortunately, there are no reliable statistics that accurately reflect how many people in Japan would benefit from redistribution of income or the severity of their situation. Preparing such data would surely provide the basis for discussion.

The Democratic Party has no performance record thus far, and simply reading the manifesto cannot provide the answer to every question. This blank slate is the root of public unease, but by performing well going forward you can earn the confidence of the public. This is a significant opportunity for the Democratic Party, and I sincerely hope that you seize it, Mr. Prime Minister, and correct the economic policies that we have had up to now.

Thank you for your consideration

Masazumi Wakatabe
Professor, School of Political Science and Economics, Waseda University

Biographical Summary
After graduating with BA and MA degrees in Economics from the School of Political Science and Economics at Waseda University, Professor Wakatabe earned credits toward a PhD in Economics in the Graduate Studies Program in the Department of Economics at the University of Toronto, before finishing with an MA in Economics. Professor Wakatabe worked as an assistant and as an Assistant Professor at Waseda University before becoming a Professor in the School of Political Science and Economics, and he specializes in the history of economics. His collaboration Research on the Showa Depression (Toyo Keizai, Inc.) won the 47th Nikkei Cultural Award for Books on Economics. His primary works include War of Economists: the Archaeology of Economics (Toyo Keizai, Inc.), Reform Economics: Economic Policy Conditions that Bring Recovery (Diamond, Inc.), and his new publications, Economic Policy in Crisis: What Caused the Crisis and What Did We Learn? (Nippon Hyoronsha Co., Ltd.), and Japan's Crisis Management Capability (PHP Institute).