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Rock and a Hard Place

© Jason Gottlieb

Japan faces a simple dilemma: tax cuts are what it needs to spur its economy and prevent a recession. But a policy of tax cuts would abandon all hope of the balanced budget and deregulation that Japan needs to prevent a recession. Prime Minister Ryutaro Hashimoto is in an extraordinarily unenviable position.

Japan's media has not shown much sympathy for Hashimoto's plight. Two influential weekly newsmagazines have called for him to resign. One boldly proclaimed that if he quit, the Japanese stock market's Nikkei Average would rise 2,000 points, almost 15%. Norio Ohga, Sony Chairman and respected business pundit, compared Hashimoto to US President Herbert Hoover right before the Great Depression, and argued that a Japanese collapse would trigger a global recession. Japan, he said, "is on the verge of collapsing."

The problem, at its simplest, is a stagnant economy. Folks simply aren't spending any money, and their savings are not being put to productive use. Even at incredibly low interest rates, corporations cannot borrow more money to invest, because banks are unwilling to lend to companies that have little chance of significant growth. Companies cannot grow significantly because government over-regulation and high corporate debts have led to reduced corporate growth, which is fueling unemployment. Tadashi Nakamae, an independent economist and former chief economist for Daiwa Securities, writes in the March 21 Economist that by the end of 1998, unemployment will reach 4.5%, and 7% by the end of 1999. According to the latest tankan survey of businesses, confidence is at a 30-year low. The lack of confidence prompts people to count their yen more carefully, and not spend very much, which brings us back to the beginning of this vicious cycle.

Undergirding this descent into economic misery is a complete lack of faith in government, thanks to recurring corruption scandals, incompetence, and paralysis. But as previously mentioned, the government is caught between two bad choices, trying to decide which is worse. Taxes: to cut or not to cut? (Hashimoto has belatedly chosen to cut taxes; more on that later.)

There is a fairly strong case to be made for both. Most Japanese, American, and even European economists argue for a significant tax cut. Even Japan's central bank governor, Masaru Hayami, has voiced support for tax cuts. "I expect to see permanent income tax cuts, and I hope to see corporate tax cuts and more efficient public spending," he told the Financial Times, saying it was more important to stimulate the economy than to cut the budget deficit. IMF First Deputy Managing Director Stanley Fischer said that the IMF supports Japanese fiscal expansion, largely in the form of a 16 trillion yen tax cut. He said, "Anyone who doubts the effectiveness of tax measures needs only to consider the effectiveness of last year's tax increase in curbing demand."