Professor, Keio University
Former Minister of Economic and Fiscal Policy
Takenaka says Prime Minister Abe's major economic policies dubbed the "three arrows" are making a positive impact. But he says only half of the work has been done.
"The first arrow is very ambitious monetary expansion... this has been already done. The second arrow is very flexible fiscal policy. A flexible fiscal policy has two meanings: fiscal expansion in the short run and midterm fiscal consolidation. So far, the first half of the second arrow has been done, but the second part of the second arrow...fiscal consolidation... has not been done yet. The third arrow is growth strategy. It is still on its way to establish a very solid policy. So, it's very important to completely fulfill these three arrows."
Takenaka says the creation of special economic zones is essential. He says they'll spur economic growth.
"This is a symbol of deregulation. Of course, the function is limited in the special economic zone, but if this deregulation becomes successful...while considering various kind of factors... labor input, capital input, technology progress...this will have a very strong impact to make economic growth much faster, maybe from 1 percent level to 2 percent or 2.5 percent level."
The government will raise the national sales tax this April. The Prime Minister will have to decide if he'll raise them further in 2015. Takenaka warns a tax hike alone won't solve the ballooning debt problem.
"I have long been against consumption tax hike...because this will not solve the fiscal consolidation problem. In the year of 2003, the primary deficit was 28 trillion yen, about 6% of GDP. However, in the end of 2007, this primary deficit declined to 6 trillion, or only 1 percent of GDP. Why? We didn't increase consumption tax at that time, but we placed a cap on expenditures. So, it is important at the same time to reduce the expenditures, fiscal expenditures, especially focusing on social welfare cost. It's a very difficult choice, and this is partly painful to general public".
And Takenaka says Japan needs to keep up the momentum... or will risk slipping back into economic stagnation.
"Abe government has been postponing three important policy issues. One is social welfare reform that I mentioned. Another one is the decentralization of the government system. And the third one is energy issue. According to the promise of the ruling party in the last election, within about 2, 3 years they will establish a complete energy supply-demand plan. But this is not discussed very seriously yet. And of course TEPCO issue should be discussed more seriously. Is the current system enough to stop the water contamination of the nuclear power plant? "
Takenaka says Japan's leaders also need to be aware of the drastic changes taking place in the rest of Asia.
" In the World Economic Forum meeting taking place in Davos this month, we're going to discuss how to create sustainable growth. Now, the world economy is recovering slowly but steadily. The task for us is how to ensure this recovery trend.We should also pay more attention on the structural change of the global economy, especially in Asia. Very recently, Professor Mahbubani, professor of the National University of Singapore, wrote a very interesting book titled The Great Convergence. 500 million people belong to the middle class in Asia. But this number will become 3.5 times in about 7 years. This is amazing. 7 years, 2020, is the year for Olympic game in Tokyo. How to incorporate this kind of change for our economic growth is another important discussion topic. This is a structural issue, but I think this is a very important one."