Interview: Former Economic and Fiscal Policy Minister Heizo Takenaka, Former BOJ Exec. Director Hideo Hayakawa
Jan. 9, 2018
It's been 5 years since Prime Minister Shinzo Abe launched a set of policies known as Abenomics. In the first of a 3-part series on the future of the Japanese economy, NHK World's Yuko Fukushima joins Newsroom Tokyo anchors Hideki Nakayama and Aki Shibuya to report on her interviews with 2 economists.
Heizo Takenaka served as Economic and Fiscal Policy Minister in the early 2000s. He now advises the Abe administration on Japan's growth strategy and other matters.
Hideo Hayakawa is a former executive director at the Bank of Japan. He's been watching Abenomics closely, in particular monetary policy.
Shibuya: So what's the current status of the Japanese economy?
Fukushima: Well, let's begin with the stock market. In 2017, the key index -- the Nikkei -- rose 16%, starting the year below 20,000 and surging above 22,700. GDP grew 1.5% -- that's quite high for Japan. Exports led the expansion, and Japanese companies logged an all-time high in terms of profits. Turning to 2018, I asked both economists about their outlook for this year. Here's what they had to say.
Takenaka: Maybe this year the Japanese economy will continue to recover. We are now in the process of the moderate recovery. Slowly but steadily, the economy had been recovering. And well, also the global economy is also recovering. Fortunately, we are now in a really very good condition.
Hayakawa: In this year, we expect some deceleration in global growth, so deceleration in exports. But, given verifiable corporate earnings, coupled with a very tight labor market, we naturally expect the Japanese economy will continue moderate growth.
Nakayama: So both economists seem to share a rather bright outlook for Japan. Is that linked to Abenomics?
Fukushima: Yes. Prime Minister Abe lent his name to a 3-pronged approach to put the economy on a recovery track. Number one is an ultra-easy monetary policy. That means pumping money into the market until inflation rises to the target of 2%. Two -- propping up the economy through massive fiscal spending. And lastly, a growth strategy based on fostering the industries of tomorrow -- the ones that will drive the economy in the long run. Let's hear how both economists view the impact of Abenomics so far.
Takenaka: Abe's economic policy played a very important role for the recovery of the Japanese economy. When the so-called regime change decided -- this was in late 2012 -- the stock price, Nikkei stock price, was 8,400-8,500 range. Now, the stock price is nearly 3 times. Well, this is the impact of the monetary expansion of the central bank, Bank of Japan, and this is the important part of Abenomics as you know. And also, we had a very significant change in the labor market. Now the rate of unemployment is below 3%.
Hayakawa: The momentum of Abenomics to some extent faltered after the ignition phase of a year or so, we saw sort of a stagnant period for a couple of years or so. Then, we see a sort of second hump of Abenomics, I mean the Japanese economy. This acceleration started in the middle of last year, but this is the reflection of global growth, not Abenomics.
Fukushima: One of the main objectives of Abenomics is to get Japan out of deflation. Over the past 20 years, the price of goods hasn't changed much. The central bank imposed an ultra-low interest policy and even introduced negative rates to encourage inflation. Despite that, 5 years on, the inflation rate still hovers around zero.
One side effect of the Abe government's massive stimulus packages is the growth of national debt. By international comparison, Japan's debt-to-GDP ratio is by far the largest among all developed countries.
Looking ahead, the picture doesn't improve. At the end of last year, the government adopted yet another record budget for fiscal 2018 -- and more than one third of it will be financed through additional debt. The 2 economists I spoke with have a different view on how the government should proceed.
Takenaka: Well, many people say, “Well, the debt-to-GDP ratio is higher than 200%,” but this is discussing only the gross debt. But much more important is net debt. Net debt means the gross debt minus assets. But net debt is not so huge at this moment. So, fiscal consolidation is needed, but this is not so urgent. This is my basic recognition. Well, the Japanese fiscal deficit is not so huge as it’s often cited, and tax hikes should not be taken before inflation target is reached.
Hayakawa: Why does the government keep a huge amount of fiscal deficit, when the economic conditions are so good and labor market is extremely tight? There’s no reason to keep fiscal deficit.
Fukushima: What do you think will happen if the Japanese government continues this expansion of fiscal policy?
Hayakawa: Default. Japan’s fiscal deficit is so large we should do everything. We need more tax, we need streamlining of government expenditures, especially social-security related, and we also need a little more inflation.
Nakayama: So Takenaka says Japan shouldn't worry too much about debt because it has many assets. And on the other hand, Hayakawa believes Japan is going to default. Isn't that going a bit too far?
Fukushima: Not really. Some economists say that even if Japan could sell all its assets, it would be a one-time deal, and the country would still go bankrupt. That's because Japan's budget depends heavily on government bonds, meaning debt keeps piling up. Hayakawa's point is that Japan needs to balance revenue and spending to achieve a zero deficit.
Now, moving on to the final point: the road ahead. I asked what the government should do in the long run to ensure the Japanese economy continues to grow.
Takenaka: Deregulation is the most important one. For that purpose, Abe's government established the system of the special economic zone. And also, we are going to start another system, so-called: “Regulatory Sandbox.” This is a place, a kind of a testbed for new kind of businesses.
And the second, the longer, much longer target, and more difficult target is maybe relating to demography. The very straightforward expression means immigration. Immigration. Well, now the total population of Japan is declining, as you know, and beyond 2030 maybe, every year, roughly speaking, the total population of this country will decline by one million every year.
Hayakawa: Japanese labor relations, the life-long employment, seniority-based wages, frequent job rotation, and so forth, was very good in the age of economic catch-up. But it has become obsolete in the age of globalization and digitization. So we need sort of an overhaul of Japanese labor relations.
So I think that the private sector itself has to change the working style, but government should adjust tax system, social security system, which is the complement between the work style.
Nakayama: So it's quite a contrast. Deregulation and immigration on one side, overhauling the labor market and social security on the other. Do these 2 economists agree on something?
Fukushima: They do, at least on the idea that the government is acting too slowly on the 3rd and most important pillar of Abenomics -- the growth strategy.
The other 2, monetary and fiscal policies, are just emergency measures to get the economy running again until new industries take off and contribute to economic expansion. So time is running out for Japan. If the government fails to take decisive action while the global economy is doing well, it won't have any ammunition to tackle the next big downturn.