Why don't Japanese take to the streets?

The Eurasia Group's Ian Bremmer has an op-ed in the IHT in which he argues that despite widespread pessimism among Japanese regarding their country's future, things may not be so bad. Basically he suggests that the DPJ may well be learning to get along with business elites and bureaucrats, Japan and the US may be rebuilding their relationship after a remarkably bad year for the alliance, and, finally, the Japanese people have not taken to the streets in opposition to their government.

I'm not sure I buy his argument, at least not entirely. His first two arguments are more or less acceptable, although I find little to praise in how the Kan government prevaricated and ultimately failed to lead on the issue. And I don't think Japan's foreign relations follow the "China down, US up" pattern Bremmer suggests — the Kan government is no less committed to fixing relations with China than it is committed to maintaining a healthy relationship with the US, consistent with the DPJ's position that Japan is not in a position to choose between the US and China.

What I'm interested in is Bremmer's argument about the relative stability of Japanese politics as measured by the lack of demonstrations, riots, and rallies with people carrying signs likening the country's leader to various twentieth-century dictators. In this superficial sense he's right: over the past two decades Japan has seen none of the upsurge in extra-parliamentary politics that one would expect a country in dire economic straits to experience. Bremmer's argument — that two decades of stagnation — is perfectly reasonable. It is difficult to see how a deflationary economy would lead people to take to the streets, particularly without the benefits cuts that have produced demonstrations and riots in Western Europe. 

Would Japanese continue to abstain from extra-parliamentary politics if, say, the Kan government pursued austerity with the same zeal as the Cameron government? And if they would continue to stay out of the streets, why? What's so different about Japan that the Japanese people seem content to express their dissatisfaction in public opinion polls and in the voting booth (which they have done regularly for decades, for despite the LDP's success in general elections there is a history of the LDP being punished in local and upper house elections)? I don't know the answer, and I certainly can't hope to come up with the answer in a blog post. However, the decline of Japanese extra-parliamentary politics since the 1960s, particularly compared with other rich democracies, is one of the more interesting puzzles in postwar Japanese politics and I don't think this puzzle has an obvious answer.

Is it political culture, for example the lack of an anti-government subculture like in the United States? If so, what changed since the 1960s? The decline in the kind of organizations that might facilitate collective action (student groups, unions, etc.)? The lack of the kind of welfare benefits that, when cut, can cause to demonstrations in defense of the status quo? The result of a half-century of LDP rule, which habituated citizens and interest groups to a certain approach to politics that left little room for public demonstrations? 

If Japan is in fact more stable than other rich democracies, it would be helpful to understand why, not least because if Japan were to pursue benefit cuts in order to shrink the deficit, it might enable us to predict whether Japanese politics will continue to enjoy "relative domestic tranquility."

Asō makes a pun

Speaking before the Upper House Budget Committee on Monday, Prime Minister Asō Tarō reached a new low for an LDP leader attacking the opposition DPJ.

Asō was addressing the debate regarding the DPJ's plans to finance new spending by cutting wasteful spending and tapping the so-called "buried treasure" of Kasumigaseki, surpluses in the government's numerous special account budgets. Calling upon the DPJ to be more specific about the sources for the 20.5 trillion yen in spending proposals in its manifesto, Asō then said the following:

"The DPJ is flying the flag of regime change, but if there is regime change, there will probably be a recession."

民主党は政権交代を旗印にしているが、政権交代は必ず景気後退になるだろう。

It seems that Asō, known for stumbling over words (like this recent gaffe), was trying to make a pun, connecting 政権交代 (seiken kōtai) to 景気後退 (keiki kōtai). Nicely played, Mr. Asō.

Except that I can think of at least two things wrong with this critique. First, it seems that Asō has forgotten that Japan is already in a recession. Perhaps someone could show him the latest labor survey released by the Ministry of Internal Affairs and Communications, which found that the unemployment rate rose to 5.2% in May. Naturally Asō would wave off this complaint by repeating the refrain about the "once in a century economic crisis originating in America," but whatever the source, Asō is hardly in a position to be talking about recessions to come, not with Japan mired in a rather severe one under his own government.

Second, the causal logic in this statement is dubious. How exactly will the DPJ cause a recession by not offering a clear account for how it intends to pay for its programs? Is Asō is suggesting that LDP profligacy caused past recessions? How exactly will the DPJ's failure to outline in precise detail how it will pay for its programs trigger a recession? Or is Asō speaking in a general sense, that the DPJ is so clearly maladroit at governing that it will drag Japan done? If so, one need only ask about Asō's own party, or his own government, for that matter, which just loosened restraints on public spending. How is carefree spending under the LDP the mark of a "responsible party" but carefree spending under the DPJ the harbinger of recession?

In short, there is very little that the LDP can ask about the DPJ without having the DPJ turn around and ask the same question about the LDP.

Is the government running out of options — or out of options already?

The political system is gearing up for a debate over the government's 15 trillion yen stimulus package that could decide the timing and the outcome of the next general election.

Kan Naoto has indicated that if the government is open to revising the plan, the DPJ will cooperate to smooth its passage. What choice does the DPJ have? Now that the LDP and the DPJ have swapped preferences regarding election timing — after years of demanding an immediate election, the DPJ has backed down due largely to Ozawa Ichiro's struggles, and the prime minister, enjoying what could be a temporary shift in his favor, is contemplating an election sooner rather than later — the DPJ has every reason to cooperate if it means depriving the government of an issue which it can use as justification for a snap election. Although there is some debate within the party about the right course of action, it seems likely that the DPJ will opt for this strategy, forcing Aso to decide whether he will live up to his oft-repeated commitment to putting policy and the resolution of the economic crisis before politics or whether he will opt to exploit what looks like a window of opportunity for a general election.

At the same time, the DPJ ought to engage in good-faith debate for reasons having nothing to do with its political standing. Given the amount of money the government is pledging to throw at Japan's crumbling economy, the leading opposition party and master of the upper house ought to be thoroughly reviewing the government's plan and questioning whether its components are intended to stimulate domestic demand or buy the votes of straying LDP constituencies (or throw money at the prime minister's hobby). The press coverage of the government's plan makes the mistake of treating it as wholly dedicated to fiscal countermeasures. As Ikeda Nobuo notes, emergency measures comprise 4.9 trillion yen, compared with 6.2 trillion yen for the government's "growth strategy." Ikeda, a libertarian economist, says that the growth strategy measures could be conceived as old-fashioned LDP pork-barrel spending, but they should also be understood as an effort to revive old-style MITI targeting — and which Ikeda rejects as inconsistent with the latest economics research and likely to do more harm than good. The DPJ ought to be raising questions about whether the government's spending plans have the slightest chance of nurturing new industries and reorganizing the Japanese economy. Hatoyama Yukio has already started on this line of argument, but the DPJ may have a hard time continuing in this vein given its own spending plans.

Nevertheless, there are plenty of questions about the government's proposal that can and should be asked. Looking at Prime Minister Aso's statement about the stimulus package, a number of questions came to mind.

The prime minister himself said, the goal of the government's proposal is "to prevent the bottom from falling out of the economy," meaning that the government's emergency measures have less to do with stimulating consumption than with minimizing the hardship suffered by laborers and small- and medium-sized businesses. To that end, the government has pledged more subsidies for businesses that have retained employees and greater support for retraining for laidoff employees, and greater access to credit from public financial organizations for small- and medium-sized businesses. (Jun Okumura notes the importance of this measure here.) Additionally, Aso pledged greater support for working single mothers, higher child allowances, scholarships and tuition reductions for private school students, and some 310 billion yen in subsidies for rural medical institutions.

The third part is the portion criticized by Ikeda, the government's medium-term growth strategy. Central to this plan is environmental technology, and thus Aso called for spending to promote greater use of solar panels in schools, homes, and businesses and the development of electric cars. The government will also ease the burden on local authorities for public works projects (i.e., greater central government spending), will promote the construction of a Tokyo ring road, and raise the level of subsidies to localities. He also alluded to medium-term tax reform that includes a consumption tax increase, prompting Nakagawa Hidenao to criticize the prime minister sharply for speaking of a tax increase as the economic outlook worsens. (Yosano Kaoru acknowledged in a TV appearance Saturday that as the government debates fundamental tax reform it needs to set a new target for balancing the budget now that 2011 is out of the question.)

The first thing that stands out is just how much Aso has lowered his sights since January. Recall that in January Aso insisted that he would make Japan the first country to escape the crisis. No longer. Now his government is merely trying to stave off complete collapse. Aso appears to have lost much of the optimism that characterized his response to the crisis earlier this year.

The question is whether this will be too much, too late, whether the fate of the economy rests in non-Japanese hands, making the government's plan a gambit to buy time in the hope of economic recovery elsewhere. It's an expensive gambit, and the DPJ should be concerned. If the government's salesmanship works, the massive stimulus package might be enough to convince the public that the LDP is steady and reliable in troubled times and deserves to be returned to office. And if the latest stimulus package fails, it will have the unintended consequence of leaving a new DPJ government facing an economy in freefall with its options even more limited on account of the additional debt the government will issue to pay for the stimulus package (which suggests that despite Yosano's desire for progress in the direction of tax reform, the LDP has every reason to wait until after an election to commit to a course of action — why should the LDP commit itself to a politically fraught policy when it could be the DPJ's problem in a matter of months?).

The uncomfortable question raised by this debate is whether the Japanese government is wholly powerless in the face of the worsening economy. Monetary tools? Limited. Fiscal policy? How many more stimulus packages can the government pass while waiting for recovery, ensuring that future generations of Japanese will bear an ever greater burden of paying for the current government's restless impotence?

The Aso government's need for speed

Ozawa Ichiro, marking the third anniversary of his leadership of the DPJ, gave a long (and rambling) press conference at DPJ headquarters to mark the occasion.

In the midst of Ozawa's winding and evasive answers to questions pertaining to North Korea's rocket launch, political strategy, the coming general election, and economic policy, it is hard to find a coherent message, which betrays a certain lack of confidence that Ozawa and the DPJ are feeling at this juncture.

For the first time in months, the DPJ is on the defensive. The momentum has shifted perceptibly. The DPJ, rather than criticizing the government from one misstep or another, is forced to defend Ozawa's alleged misdeeds and respond to an Aso government that has appeared more vigorous of late.

Despite North Korea's pushing Nishimatsu out of the headlines for the moment and Ozawa's having secured the support of the bulk of the DPJ — the latest vote of confidence coming from Okada Katsuya, his most likely successor — for his staying on as leader, the impact of the Okubo indictment remains that the DPJ is now answering the questions instead of asking them. As the LDP knows all too well, politically it is much easier to criticize or threaten censure than to have to explain why apparent wrongdoing is not in fact wrongdoing. The DPJ has enjoyed a run of good luck, with the LDP's making plenty of mistakes for the DPJ to exploit, but now finds itself on the receiving end of the public's doubt.

Perhaps the more important reason for the swing of the pendulum away from the DPJ is the appearance of action on the part of the Aso government. Between North Korea and the financial crisis, the Aso government appears to be getting things done. I think Ozawa is right to question the government's handling of last weekend's launch, but this argument may have little political utility. The public is more concerned about North Korea than the mistakes the government may or may not have made while acting to keep Japan safe. Not surprisingly, the media wanted to know what an Ozawa government would do in the Aso government's situation. The media asked about whether the DPJ would be able to work together with the SDPJ on security policy in a coalition government, given that the party abstained from the Diet vote condemning North Korea's launch — and Ozawa prevaricated. The one clear answer he gave rejected calls within the LDP for the capability to launch preemptive strikes against North Korea. He also called for greater cooperation with China and Russia on North Korea, which is fine seeing as how the US has already beaten a well-worn path to Beijing to cooperate on North Korea, but hardly certain of yielding results. The DPJ will not win by meeting the appearance of action on the part of the LDP with mealy-mouthed obfuscation.

The same applies to the DPJ's response to the Aso government's latest stimulus plan, which will amount to roughly 15 trillion yen and push the total budget for 2009 over 100 trillion yen for the first time in history. The plan includes environmental technology projects, tax relief, infrastructure projects (lengthening the runway at Haneda, for example), allowances for children not yet in school, and greater protection for temporary workers. As Mainichi suggests, this stimulus package is redolent of baramaki, of throwing money about willy nilly.

I think it is fair to ask whether the government's latest plan will make a dent in shifting the public's propensity to consume, which remains the primary challenge for economic recovery. Claus Vistesen, in a long discussion of how the government can get people to consume more, once again comes back to demographics — he questions the argument that the government can fix the lack of domestic demand by incentivizing the transfer of wealth from the older to the younger generation and suggests that the answer is "to rely on the ability to keep a structural surplus towards the rest of the world" (which means constantly finding countries able to maintain deficits to complement Japan's surpluses, something the US may not be able to keep doing).

But without a plan of its own, the DPJ is also on the defensive on economic policy. The DPJ's "next cabinet" compiled an economic stimulus proposal this week, but for the most part it looks like the DPJ is simply trying to outbid the LDP rather than determine measures the DPJ can take to promote recovery and transformation. Promising 21 trillion yen over two years, the DPJ is offering 26,000 yen monthly child allowances (a proposal straight out of the party manifesto), making highways free, strengthening support for workers, and investing in green technology. The party is also calling for tax cuts for small- and medium-sized businesses and removing the temporary gasoline tax. Ozawa insisted that the party's manifesto remains pertinent despite economic conditions, that its focus on livelihood issues remains sound, but it is hard to escape the impression that the DPJ is punting on the most significant livelihood issue of all: the economic crisis. The party is still focused on comprehensive adminstrative reform as a means for freeing up funds. Adminstrative reform may save some money, but it certainly won't be a reliable source of funds in the short or medium run. Saving the Japanese economy will require more than cutting waste.

As a result, the party has, for the moment, ceded the initiative to the Aso government. Prime Minister Aso is even feeling confident enough to speculate openly about the timing of the general election, as he did Monday evening of this week: "Soon," he said. He may not have been serious — Sankei suggested his remark may have been intended to disorient the DPJ — but subsequent remarks suggest that the prime minister may be thinking hard about exploiting the DPJ's situation by calling a general election should the DPJ oppose the government's stimulus plans. The government is clearly desperate to appear to be doing something in response to the crisis. The content of policy appears to matter less than the recognition that the government is acting. Chief Cabinet Secretary Kawamura explicitly appealed to the speed with which the US passed a stimulus package earlier this year in a call for cooperation with the oppostion parties (ignoring the reality of the Republican Party's fierce opposition to the stimulus). The Aso government clearly wants to consolidate recent gains and build on its momentum. Whether it will succeed will depend in part on events, in part on the response of the DPJ.

The DPJ needs to tailor its message to acknowledge that it is no longer 2007. There is no ignoring the economic crisis. This week's next cabinet discussions were a start, but there is more work to do. The DPJ should have little trouble doing this: isn't fixing the economy a lifestyle issue? The DPJ cannot answer the Aso government's frenetic activity by waving its 2007 election manifesto.

The DPJ also needs to find the right message on North Korea. It ought to point to irresponsible comments on nuclear weapons by the prime minister, his former finance minister, and, most recently, Sakamoto Goji, a six-term LDP member and director general of the party organization. Asahi reported that Sakamoto stated his support for the possession of nuclear weapons and withdrawal from the UN at a meeting on Tuesday, but denied the validity of the report. If the DPJ can confirm that Sakamoto said this (confirm being the operative word), it ought to be able to appeal to public disapproval of this argument and paint the Aso government as excessively bellicose. The public certainly wants a hard line on North Korea, but there appear to be limits to just how hard a line the public will support. In general, the DPJ might be better off supporting the government on this issue, applauding the decision to go to the UN and work closely with the US and other countries. The DPJ gains little from criticizing a decision that has broad public support, and supporting the government on this issue could neutralize it in an election campaign and make the DPJ appear as something other than rejectionist.

The point is that the DPJ has not lost the next election yet. Momentum may have momentarily shifted in the LDP's favor, but the DPJ and Ozawa are still in a position to pressure the government. But it cannot merely play for time and hope that the Aso government will make mistakes.

April is the cruelest month

April is here, the new fiscal year has begun, and Prime Minister Aso Taro is in London for the G20 summit.

For once, he leaves behind a favorable domestic situation. After months of bad news, with his approval ratings skirting single digits, the press is full of reports about how Aso and DPJ President Ozawa Ichiro have traded places; Ozawa's leadership under threat from members of his own party, at the same time that LDP members have all but conceded that Aso will lead the LDP into the next election.

The prime minister should not be too cheerful, despite the early arrival of cherry blossoms and the bump in the polls.

First, as Claus Vistesen notes at considerable length, the best one can say about the Japanese economy is "while indicators are still on the decline they are now declining less rapidly." The great adjustment is under way. The pain continues to be felt among Japan's irregular workers, as 192,061 have already been laid off in the period beginning in October 2008 and continuing until June, compared with 12,502 regular employees who were laid off by April. The unemployment rate rose to 4.4%, and not surprisingly the number of new hires has dropped off substantially. 4.4%, then, is only the beginning. Is Japan facing its second lost generation in as many decades, another generation with all too many members unable to access the regular labor force? Presumably there will be more opportunities for mid-career hires when the economy recovers — surely Japan learned something from the lost decade — but in the meantime I wonder whether there will be political consequences for the burden carried by irregular employees. Can the LDP really win reelection under such circumstances?

The economic collapse is dire enough, but the malaise in which the public is mired may have even more lasting consequences. I was going to say crisis of confidence, but I think it's bigger than that: the public appears to be exhausted, fed up with leaders who appear to be powerless to stop the deterioration of the Japanese economy and indifferent to public concerns. The latest indication of the public's wearyness comes in a new cabinet office poll concerning "social consciousness." Reflecting the recent Asahi poll on political attitudes, 80.7% of respondents said national policy either does not really reflect the popular will or does not reflect the popular will at all, a five-point increase on the previous cabinet poll on this matter. The responses when asked how to fix this problem were mixed, with a plurality of 27.5% blaming the politicians for not listening sufficiently to the voice of the people, 18.8% suggesting that the people need to take a greater interest in policy. When asked what they think is going well in contemporary Japan, only technology (28.1%) ranked higher than the "nothing/don't know" response "(25.4%), although the 28.1% for technology marked an increase from 21.2%. Meanwhile, the negatives were consistent with the state of the economy: 68.6% of respondents saw economic growth as a problem, up from 43.4%; 57.5% saw employment and working conditions as a problem, up from 31.1%; and 42.9% saw national finances as a problem, up from 37.5%.

Perhaps the public is overreacting to the economic crisis, their imaginations stirred by bleak media coverage. But I suspect that might be optimistic. Something tells me Japanese households know precisely how bad things are. As the above figures suggest, the economic crisis has only deepened preexisting malaise and a sense of detachment felt by the governed regarding their government. Maybe Jesper Koll, borrowing the prime minister's message about Japan's latent power, is right to be bullish on Japan. Koll presents a range of statistics about Japanese R & D spending and patents to suggest that Japan is poised to emerge from the global financial crisis a technology superpower, that its people — again, channeling Prime Minister Aso — "possess a basic power and discipline that build a strong foundation for future recovery." He is convinced that the crisis is accelerating generational change in Japan and that it "thrives in times of hardship and global turmoil."

But for all the technological developments praised by Koll, Japanese households — "balance sheets are very strong, since Japan's deleveraging already happened during the 1990s" — still remain reluctant to invest their hoard (which recently took a sizeable blow). Koll assumes that generational change will be enough to solve the paradox of thrift, but he has little to support this assertion other than an intangible sense that companies are looking to the future. Notably absent from Koll's account is any mention of demographics, which, incidentally, are central to Vistesen's treatment of the economic crisis. "Japan," Vistesen argues, "does suffer from a a chronic lack of domestic demand and consumption and it does so exactly because relying on consumption with the current demographic profile is not viable." If anything, the demographics will only worsen as a result of the latest economic crisis, as more Japanese decide to postpone, perhaps indefinitely, marriage and childrearing.

Indeed, given the findings of the March Tankan, the worst on record, it is hard to see the basis for Koll's optimism. The survey did find large manufacturers optimistic about conditions three years ahead, but that is surely overwhelmed by short- to medium-term pessism in nearly every other category, and by the deepening gloom felt by the Japanese people. Far from "rediscovering...capitalist roots," the Japanese people appear to want nothing more than to be shielded from capitalism through more robust job protection and social security. They appear no more eager to risk their savings than at any point during the past twenty years. It is too early to say what precisely the intellectual consequences of the global financial crisis will be, but in Japan it seems that what public support existed for "neo-liberal" reforms has dried up. It might return with economic recovery, but it is unclear how that will happen — if the Japanese people cannot be convinced of the necessity of reform during a "once-in-a-century" crisis, how will they be convinced once times are good again?

The one category of reforms that enjoys public approval continues to be administrative reform, because the bureaucrats remain about as popular as the politicians. Little wonder that this year's election is shaping up to be an administrative reform election. The DPJ has, for obvious reasons, made the case that regime change will be the basis for sweeping changes in how Japan is governed. Now the Aso government has answered with its own administrative reform plans.

On Tuesday, after a prolonged battle the cabinet approved the government's plan for administrative reform, which includes the creation of a cabinet personnel agency that will be responsible for appointing the top officials in ministries and agencies in the hope of combating administrative stovepiping.

The cabinet decision, however, by no means guarantees that the government will get its way: Ozawa has dismissed the plan as mere windowdressing on an administration that will be left fundamentally unchanged, while Jiji quotes an LDP member "with experience as administrative reform minister" as warning of dissatisfaction within the LDP over the bill, not to mention opposition from the bureaucracy itself, especially the National Personnel Authority. Given the government's focus on another stimulus package, will it fight for this bill? DPJ opposition might be useful for the government, if it can paint the DPJ with the dubious label of being opposed to reform outright, but plenty of LDP members might be happy to see the bill die.

And thus while I understand Jesper Koll's desire to question the conventional wisdom, the unpleasant reality is that things are set to get worse in Japan before they get better. There is a degree of unpredictability going forward, not least in the political situation, but even the best-case scenarios suggest that Japan will be struggling with domestic problems for years to come. Even the election of a DPJ government — should it occur — will only be the beginning of the process of addressing the many challenges facing Japan.

Japan loves risk (Noah Smith)

In the past year, Japan's exports fell 45.7%. Exports to all regions were hit - down 52% to America, 45% to China, and 46.7% to Asia as a whole. Japan's mighty national champions, its automakers, have been hit the worst: Toyota's exports are off 56.2%, Honda's 46.3%, Nissan's 62.1%.

That's absolutely stunning. It is catastrophic. Words fail.

What this should demonstrate conclusively is that world economies are much more tightly linked than many economists had thought. The "decoupling" hypothesis — the idea that booming Asia could keep chugging along while America and Europe fell — has been decisively smashed (subscription required), at least in the short run.

(As an aside for the more technically minded, the "decoupling" idea rested on the same faulty assumption as the bubble in American mortgage-backed assets, namely the assumption of constant correlation. When times are good, they are unevenly good, so correlations are low and economies appear to be decoupled, but as soon as things turn bad everyone falls together and correlations shoot up.)

In any case, what does this mean for Japan? It means that being a "surplus" country has proven to be just as risky, if not more so, than being a "deficit" country. Relying on exports exposes you to big shock and wild swings. The myth that Japan, as a nation or as a people, is more risk averse than other countries should thus be exposed as the outdated stereotype that it is. Over-reliance on exports, as it turns out, is similar to playing roulette. For the LDP, it may very well have been Russian roulette.

The last time the dice came up snake-eyes for exporters was a very long time ago — the 70s, in fact. But Japan was still a fast-growing country then, still playing catch-up to the West in technology and capital. Japan responded to the world recessions of the 70s by moving up the value chain, developing global brands and launching headlong into high-tech industries like autos, electronics, and machine tools. The recession was sharp but brief, the party quickly resumed, and the LDP lived on.

Today, that scenario is more likely to befall China than Japan. The record of the last two decades should decisively show that Japan is a fully developed country — it has hit the frontiers of technology and capital. There is no more low-hanging fruit. And that means that recessions are much more likely now to expose the structural flaws in the Japanese economy...of which there are, sadly, still many.

After the LDP goes, the DPJ will have two basic choices: fix structural flaws (the Bill Clinton approach), or encourage bubbles (the George W. Bush approach). I'd advise leaning heavily on the first approach, of course, but the problem is that structural flaws are often politically motivated. Powerful construction, agriculture, and small- and medium-sized business lobbies will use recessions as an excuse to delay reform, and booms as an excuse to ignore the need for reform. Without electoral reform that decreases the clout of these lobbies, the DPJ may find itself forced to turn to more dubious strategies of economic revival.

Whatever happens, though, let no one in Japan now doubt that export dependence is a very high-risk strategy for any nation.

— Noah Smith

Shop for Japan? (Noah Smith)

It has often been said, by this writer and others that Japan needs to "raise domestic consumption" in light of the current economic crisis. In actuality, this is a murky concept. There are a number of different reasons for this, and a number of ways it can be done.

Reason 1: Correcting international imbalances. "Surplus" countries (Japan, Germany, and especially China) produce more than they consume, "deficit" countries (the US and UK) consume more than they produce. This is unsustainable (obviously), and fuels dangerous bubbles. If Japan and the Surplus Gang consume more, the US can safely consume less without wrecking the world economy. Of course, it's too late to save the world economy this year, but if the imbalances persist, this will all just happen again.

So raising consumption is considered the safest way for Japan to help fix the international financial system.

Reason 2: Avoiding a steep drop in output. If Japan sells less to the world — as is now inevitable — it can either make less or consume more. Making less means Japanese companies must either go out of business, lay off workers, or cut wages; or, more likely, all three. It means Japan will be a less wealthy place.

So raising consumption is considered the least painful way to weather the global recession.

Reason 3: Reducing export dependence. Exports are dependent on external demand, and therefore subject to big, abrupt swings. It is difficult for the government to either predict or prevent these swings. Consumption in Japan represents only 55% of GDP, compared to almost 70% in the U.S. If Japanese people are really as risk averse as they are rumored to be, they would naturally like an economy that is less vulnerable to the wild storms of global demand.

So raising consumption as a percentage of output is considered a way to reduce future risk for Japan's economy.

There are other reasons, but these are the big three. Now the question becomes: How does Japan accomplish this feat? I am guessing that telling people to "get out there and shop," as Bush did after 9/11, will go over like a lead balloon.

The classic way of boosting consumption is to lower interest rates, which discourages saving. However, Japan's interest rates have been at or near zero for a long time, so there is no more ammo in that gun.

As I and others have noted, Japan's aging and shrinking population bodes ill for future consumption. It also makes it harder to strengthen the social safety net (since young workers are needed to pay for the pensions of old retirees). Immigration will not increase enough to compensate for this decline. Even the U.S., with over a million new immigrants a year, is aging. That leaves the much-discussed fertility rate.

Finally, there is trade. Increasing imports doesn't seem like it will raise Japanese output, but as I noted in an earlier post, it does. Output is measured in real terms. If you lower import barriers, you can get 20,000 apples per Prius instead of 7,000. That means you are richer, even if some domestic apple-growers go out of business. And it also helps reduce global financial imbalances and bias the economy toward consumption, as well. Of course, this is tricky. If you open up your country to trade with protectionist countries, as the US did with China, you can find yourself on the receiving end of a disruptive flood of cheap money. But free trade with relatively open, rich countries like the US and Europe, as well as with poorer countries like Southeast Asia and Latin America would be a great idea.

And then there's my own idea: harness wealth effects. Most Americans are homeowners. Far fewer Japanese people are. Changing regulations, especially taxes and land-use regulations, could increase that rate. The economic security afforded by homeownership could conceivably raise consumption rates, and the extra living space might encourage larger families.

In any case, "Shop for Japan" is not nearly as foolish a motto as "Shop for America" proved to be in the earliest part of this decade. Balance, in economics as in so many things, is the goal. And a more comfortable lifestyle for the hard-working, long-suffering people of Japan would not exactly hurt the electoral prospects of the party that could deliver it.

- Noah Smith

The long and short of it (Noah Smith)

Gerald Curtis's article in the Financial Times deserves a response from me as well. The short version of my response is that I agree with Tobias: the fact that the DPJ will not be able to avert a depression is not sufficient reason to write them off.

The longer version is this: Curtis is right when he says that "whatever the political goings-on, there is no optimistic short-term scenario for Japan." But he is wrong to blame that fact on Japan's current political mess. With international demand collapsing and public debt at well over 100% of GDP, Japan's government is essentially unarmed. Were Japan led by a triumvirate of FDR, the Meiji emperor, and Yoda, there would still be next to nothing the government could do to stave off a steep drop in exports, and thus investment, and thus GDP.

This does not mean, however, government action is unimportant. Keynes may have said that "In the long run, we are all dead," but we should be thankful that leaders in his day did not take that to heart. I may be a short-run pessimist on Japan, but I'm a long-run optimist and a medium-run agnostic. In the medium and long run, government will be the key to Japan's performance.

What can be done to boost Japan's performance three or four years from now? By my count, at least two big things. The first is free trade. As soon as worldwide demand begins to recover, Japan could get the jump on rivals like South Korea and Taiwan by signing real — not cosmetic — free trade agreements with Asia, Europe, and the US. And a lowering of food prices would instantly boost Japan's real per-capita GDP without Toyota having to sell one more Prius.

The second is to get more women into the workforce - and fast. Ken Worsley notes that women, who make up half of the labor force in the West, comprise only 40% in Japan. This means that Japan's labor force participation rate is much lower than America's. Although not measured in the low official unemployment rate — stay-at-home women are more likely to say they "don't want to work" than that they "can't find a job" — Japanese women's de facto status as a quiet economic underclass represents a huge loss in national output. A big push by METI to encourage companies to hire more women, coupled with an expansion of day care, could work wonders when the depresion runs out of steam.

Will the DPJ do these things if it is elected? Your guess is as good as mine. But then there is the long run.

Economists believe that national crises — wars and depressions — represent opportunities in disguise, for it is only during these fluid times that nations can change their basic institutions. This is evident when we look at America in the Great Depression. FDR's stimulus spending may or may not have made things better — the debate continues to this day — but few would deny the long-term importance of Social Security and the FDIC. Japan's next group of leaders will be offered a similar chance.

The three institutions that must urgently need changing are, of course, the bureaucracy, corporate governance, and fiscal mechanisms. The DPJ proposes to shake up the cozy, stifling relationship that has turned all three of these institutions into pipelines for waste, pork, protection and inefficiency.

Imagine if this had been done a decade ago. If Japan had not thrown trillions upon trillions of yen at constuction companies, it might have the fiscal ammunition to fight today's slump. If inefficient companies had not been sheltered from harm, Japan might not have built up the overcapacity that is making its current depression even deeper. Women would be working more and labor markets would be more flexible. Yet nothing was done, two decades passed, and, pace Keynes, most of us are still alive to face the consequences.

This is why I agree with Tobias. If the DPJ did nothing except reform Japan's central institutions — if it utterly ignored the medium-term — that would still lead to an incalculable improvement ten or fifteen years down the road. To throw up one's hands, as Gerald Curtis does, is to encourage a false sense of helplessness. Which, in a sense, is the only thing we have to fear.

- Noah Smith

A pox on both their houses?

Writing in the Financial Times, Columbia's Gerald Curtis laments the impotence of politicians from both the LDP and the DPJ in the midst of a historic economic crisis.

The LDP, he writes, is "like the proverbial deer staring into the headlights...paralysed by fear rather than energized by it." But the DPJ is little better, as he argues, "the stark reality is that the party has no clue about what to do either in its first 100 days or thereafter."

There is much truth in what Curtis writes, but I think he takes his criticism of the opposition party too far.

The problem is this line: "The DPJ talks about replacing bureaucrats with politicians in key ministerial positions but says virtually nothing about what policies these newly empowered politicians would implement."

Curtis argues that because the DPJ has no plan for dealing with an economic crisis that may ultimately join the ranks of the most significant economic crises to hit Japan, it is to be condemned for having no ideas. If the DPJ is to be condemned for being dumbstruck by the crisis ravaging the Japanese economy today, it should be condemned alongside not just the LDP, but the entire Japanese establishment, which seems to have little idea of how to respond but with textbook economic stimulus measures. The extent of the crisis is the result of the LDP's postponing the day of reckoning for the export-led model; as Noah Smith has argued at this blog, the costs of the government's failure to transform Japan's economic model so that the "Japanese people...buy more of the stuff, or make less of it" are dire. Having failed to induce the Japanese people to do the former, the whole country is now suffering the consequences of the latter.

There is little the LDP or the DPJ can do to reverse this, aside from easing the pain in the short term, while setting to work on the overdue task of remaking the Japanese economy over the medium and long term. Pump priming at this point is nothing more than a stopgap. Japanese officials need to find a way to replace foreign demand with domestic demand, a change that will not occur overnight.

Which is where administrative reform comes in. Curtis is mistaken to minimize the value of the administrative reform plans developed by the DPJ. As politicians in both parties recognize, administrative reform is an indispensable first step to remaking Japan, because bureaucratic-cabinet rule — as the LDP system of government has been called — has been a major source of paralysis, preventing the government from establishing clear priorities and adjusting policy in response to structural shifts (demographic change, the intensification of the dual economy and the hollowing out of industry, the decay of the countryside, etc.). Without the creation of cabinet rule, the avowed goal of the DPJ's administrative reform plans, the Japanese government will continue to dither in the face of outright collapse regardless of which party is in charge.

The DPJ, in short, aspires to do what Koizumi Junichiro tried and failed to do: centralize both authority and accountability in the prime minister. DPJ reformists have studied the pathologies of LDP rule closely — in particular the failure to subordinate the party to the cabinet and the failure to unify cabinet ministers around the government's agenda — and have devised remedies to ensure that DPJ rule is cabinet rule. These plans are contained in the DPJ's transition plan, which outlines how a DPJ government will proceed in reforming governance during its first 300 days in power.

Of course, having a plan is different from implementing a plan, as plans never survive first contact with the enemy, in this case the bureaucracy. Should Ozawa Ichiro become prime minister, it will take the whole of his political acumen to inspire, bully, or bribe bureaucrats into accepting the DPJ's reform plans, and clearly the party will not get everything on its wishlist. But that doesn't mean that administrative reform shouldn't be a top priority for a DPJ government. In some sense, administrative reform can have a multiplier effect, freeing the government to establish clear priorities — based on its electoral manifesto — and then proceed with other reforms (and be held accountable for failures in meeting their avowed goals).

Returning to the question of how the DPJ would respond to the economic crisis were it to form a government later this year, like Curtis I too have recently talked with a DPJ member with expertise in fiscal and economic policy, having started his career in the ministry of finance. This member, having seen the Obuchi government's attempts to stimulate the faltering Japanese economy in the late 1990s, was skeptical about the Aso government's stimulus measures, but insisted that the response to the crisis must involve thinking about the structure of the Japanese economy and directing funds to support R & D in sunrise industries. This member also looked back at New Labor's 1997 victory and stressed that the DPJ, like Tony Blair, must stress "education, education, education." (Ikeda Nobuo, the neo-liberal economist, argues that the government is incapable of identifying and supporting growth industries in the manner suggested by this DPJ member, and that the key to promoting growth industries is opening Japan's economy to the world.)

In short, Curtis is wrong to chide the DPJ for not having the answer to the economy's falling off a cliff, with, as suggested by Edward Hugh, the worst still to come. Hugh, like Noah Smith, sees that the answer is not in short-term stimulus but in long-term reform of what he calls the "national mindset," with Japan's fixing its fertility problem and becoming more welcoming of immigrants. Similarly, Smith concludes, "After this crash — the recession Japan should have had in the 90s — Japan will have nowhere to go but up. Leaner, more profit-driven companies will start looking for hires — hopefully something between the full-time and part-time positions of today. Women will find themselves on a more level playing field. There will be room for new industries, new entrepreneurs who are not the first sons of old entrepreneurs."

They key going forward, therefore, is not having the perfect stimulus plan, because, as Yosano Kaoru argued, Japan will not escape the global recession alone. The key is for the government to be ready when the economy begins to recovery, ready with a refurbished social safety net that encourages more risk-taking by Japanese, a reformed education system that prepares Japanese citizens for life in a new economy, higher levels of immigration, and work-life reforms that enable Japanese women to balance having a career and having a family and thus enabling more women to contribute to the economy for longer periods of time. None of these changes will be realized without transforming how Japan is governed.

If the DPJ can make some progress in creating a new relationship between cabinet and bureaucracy while restarting Japan down the road to structural reform (although perhaps not structural reform of the Koizumian kind), it will have gone a long way towards making a brigther future for Japan.

Curtis may be right that there is "no optimistic short-term scenario for Japan," but the likely change from LDP to DPJ should not be viewed as pessimistically as Curtis sees it. Should the DPJ win, it will have a mandate to govern and it will be in control of both houses (although its control of the upper house will be contingent on partners). The party would of course be occupied initially with simply easing the pain of economic adjustment, but it will also be in a position to begin the hard work of administrative reform, for which it already has plans in hand.

Nakagawa will not survive

Nakagawa Shoichi's behavior at the G7 meeting in Rome — the slurred speech heard around the world — has quickly become a full-blown scandal.

With the rallying cry of "exposing disgraceful behavior," the DPJ, the SDPJ, the JCP, and the PNP are preparing to submit a (non-binding) censure motion in the upper house.

Mr. Nakagawa will go because his transgressions occurred on the world stage, in full view of the foreign media. While I do not expect it, if Mr. Nakagawa's conservative comrades were consistent, they would call for his immediate resignation for having defamed the Japanese nation abroad. Indeed, if Mr. Nakagawa was as serious about national pride as his past rhetoric suggests, he would willingly step down. But in lieu of such behavior from Mr. Nakagawa, the DPJ appears more than willing to take up the cudgel of nationalist rhetoric — more often used to criticize leaders "guilty" of traitorous negotiations or apologies — and pressure Mr. Nakagawa and the government. (Yet another reminder that the DPJ, far from being a progressive party, is comfortable with the language of the nationalist mainstream.)

But it appears that Mr. Nakagawa and Prime Minister Aso are digging in; Mr. Aso has asked Mr. Nakagawa to stay on, and Mr. Nakagawa continues to insist that his unusual behavior was the result of taking too much cold medicine combined with pain killers for back pain. The government will, not surprisingly, ignore any censure motion passed by the upper house. It will continue to insist on the "cold medicine" story — Mr. Nakagawa visited a doctor who certified that he has cold symptoms — in the hope that the scandal will go away quickly. Members of the team that traveled with Mr. Nakagawa have been called before the lower house's fiscal and monetary affairs committee to attest that they do not recall seeing the minister drink during lunch at the G7.

But despite these gestures, it is unlikely that the government will succeed in protecting Mr. Nakagawa for long.

More significant than the opposition calls for Mr. Nakagawa's head, Yomiuri reports that members of the LDP and Komeito want the finance minister to go. Some fear that a prolonged struggle with the opposition over Mr. Nakagawa's fate will stall the debate on the 2008 second supplementary budget related bills and the 2009 budget, and are ready to toss the finance minister overboard if it means that debate can resume. Of course, removing the finance minister in the midst of debate over the government's response to the economic crisis could be equally detrimental to pushing legislation forward, and would no doubt be accompanied by calls for an election from the opposition.

The question of the cause of Mr. Nakagawa's behavior, however, seems tangential to the debate over Mr. Nakagawa's future. Whether he was drunk or not, his alcoholism is no longer an open secret — it's simply open. Following closely on the heels of Mr. Nakagawa's mistake-prone performance in late January when he gave his policy speech to a joint session of the Diet, when he made a number of errors in presenting his remarks, it is hard to avoid the impression of the finance minister as, in MTC's word, a "broken" man. Should he be punished for overdosing on cold medicine? No, of course not. But if Mr. Nakagawa's addiction has become a problem, it is a matter of national concern. For that reason, Mr. Nakagawa's doctor's note will not be enough to dispel questions about his behavior. The Japanese people have a right to know the state of Mr. Nakagawa's health, beyond whether he has the sniffles.

But ultimately it will come down to where Mr. Nakagawa's indiscretion occurred. By appearing drunk when representing Japan in one of the world's most exclusive club — membership in which is a point of pride for Japanese elites — Mr. Nakagawa has disgraced his government and his country, an impression that will be reinforced the more video of his performance circulates around the internet and in foreign media. Japanese leaders, always sensitive to how Japan is perceived abroad, may ultimately feel compelled to approve Mr. Nakagawa's resignation, whatever the consequences for the Aso government.

This scandal reinforces the impression that the Aso government is completely bereft of authority and legitimacy. If it has not become a laughingstock home and abroad already, the Aso government is rapidly becoming one. And yet in the midst of this scandal and his plummeting popularity, Mr. Aso insisted that he is throwing his whole being into fixing Japan's economy.

Like Beaumarchais's Figaro, I laugh so as not to cry.

The can kicks back (Noah Smith)

In my earlier post, I stated that Japan's current-account surplus can vanish in one of two ways: either Japan can consume more (which it won't because of debt and demographics), or it can (over)produce less. That is true. But when the adjustment happens is not set in stone.

A casual observer might think that Nakagawa Shoichi's speech condemning protectionism might sound a little hypocritical, coming as it does on the same day that he threatened to intervene in currency markets to weaken the yen. But from the perspective of very-short-term Japanese national interests, the policies are complementary: the only way to stave off the day of reckoning I described earlier is to pump up exports. Naturally, that will only make the adjustment more painful when it happens, but given current electoral politics one could understand why the LDP isn't exactly planning for the long term. Instead of letting Japan take its lumps now and planning for a brighter future, it seems fairly certain that the LDP will fall back on the old "developing-country" export-promotion, and kick the can a few feet down the road.

But kicking the can carries another, little-mentioned risk. So far, American and British economists and executives have been holding the line against a rising protectionist tide, evoking the memory of "Smoot-Hawley" like a mantra. So far the line has held, as America's Democratic politicians have been too afraid to reach for the bazooka. But the consensus is badly fraying, with Paul Krugman saying he can see the case for "Buy American" provisions in America's stimulus bill. The monster is straining the bars of its cage. And if America's ire is ever roused against Japanese currency manipulation, the US will be far quicker to act than it has been against China; after all, US multinationals do not have their factories in Japan.

No one knows how much a modern-day round of "Japan bashing" would hurt Japan's economic model, but I suspect it would be more severe than nearly anyone can imagine. Japan's much-discussed "dual economy" relies on a compact in which the bureaucracy distributes the rents from world-beating export industries to a host of less efficient domestic industries and small businesses. In the 70s and 80s those rents came from the superior operational efficiency of Japan's auto, electronics, and machine-tool champions; in the mid-2000s they came from the costs saved when those champions moved their operations to China. If America closes its doors to Japanese imports, those rents will vanish and the compact will be broken.

So a best-case scenario for the LDP's kick-the-can strategy is a delayed, more-painful adjustment in maybe three or five years. A worst-case scenario is that American protecionism rises from the dead and smashes Japan's economic model like the hammer of a vengeful god.

In choosing to run the dreadful risk of delaying Japan's day of reckoning, the LDP has proven what many of us always knew — that it represents only a subset of the Japanese people, all its claims to the contrary.

- Noah Smith

The accounting reaper cometh (Noah Smith)

A specter is haunting East Asia. Consumption is falling in the world's "deficit" countries, as American and British consumers rebuild their balance sheets. The global current-account and capital-account imbalances are thus coming under immense strain. An accounting identity states that for the imbalances to vanish, one of two things must happen in the "surplus" countries: either consumption must rise, or production must fall. In layman's terms, Japan has for at least a decade been making more stuff than was efficient for it to make. Now either Japanese people must buy more of the stuff, or make less of it. As one of the two big rich "surplus" countries (the other being Germany — the Axis of Overproduction?), Japan will not be able to escape the adjustment. It is too big to continue to overproduce and hope that some other overproducer will start overconsuming.

The optimal solution, as most international economists have stated, is for China, Germany, and Japan to boost their fiscal sending by huge amounts — much more than America — to increase domestic consumption. China is already doing this. Germany, for reasons that I won't go into, is not. That leaves Japan.

The smartest way for Japan to raise consumption would be to expand social security and unemployment benefits. People plan for the future (they base much of their consumption on their "permanent income"), so government spending that is guaranteed in perpetuity is more effective at getting people to spend now — otherwise they may just squirrel their money away to guard against future tax increases. But thanks to its massive debt overhang and low birthrate, Japan will find it had to do either of these. The dead hand of the 90s reaches up from the grave to throttle our best hope of escape.

So what will happen in Japan? Gravity. Japan will fall to something closer to an efficient long-term production level. This means jobs lost, whether it's the cushy full-time type or the hand-to-mouth Dickensian temp type. It will mean big losses and industry consolidation — farewell to a few more of the corporate baronies of Japan's old entrepreneurial families. It will mean more angry street protests from the laid-off temps and more lonely suicides from the laid-off lifers. More divorces, fewer children. A spiral of lower consumption and higher unemployment. Empty apartment buildings, higher petty crime. Yakuza and foreign mafias taking over more neighborhoods. More teenage girls and married women turning to prostitution in the soaplands and deri-heru services, sometimes pushed by their parents and husbands. Families squatting together in cramped conditions. Rural ghost towns. Heat shut off in buildings in winter, people accidentally dying of malnutrition from eating cup ramen too many days in a row.

Accounting looks pretty ugly in real life.

And the thing is, there is very little Japan's government can do about this. For too long, Japan has pretended to be a richer country than it is, not unlike how American consumers used easy credit to pretend they were richer than they were. In fact, that same American deficit spending, funneled through exports or through China, was what kept Japanese wages and profits above what production-efficiency dictated. The bill has now come due; Japan must wash off its makeup, take off its go-go boots, and stagger out the back of the dance club. And this is a sad thing. Those whimsical economists who have studied the phenomenon of "happiness" — myself included — have generally found that happiness comes to people who are coming up in the world. Someone who makes $50,000 when last year they made $40,000 is more likely to be happy than someone who makes $100,000 but who last year made $110,000.

Japan, sadly, chose the short-term illusion of wealth over the chance to climb higher in the future. They chose it when they pulled the lever for the LDP.

But I'd like to end this dreary litany with a little hope. Falling back to an efficient level of income will be painful for today's Japanese people, but it had to happen. After this crash — the recession Japan should have had in the 90s — Japan will have nowhere to go but up. Leaner, more profit-driven companies will start looking for hires — hopefully something between the full-time and part-time positions of today. Women will find themselves on a more level playing field. There will be room for new industries, new entrepreneurs who are not the first sons of old entrepreneurs. Researchers will invent new technologies, and start companies to sell them — the nerds will win out. And if Japan changes its political system now...if it lays the pipes for a workng social safety net...if it dramatically cuts bureaucratic meddling...if it modernizes its corporate governance and legal system...then the rebound will be deep and lasting.

That is why right now, in the depths of Japan's despair, is the most important time to elect new politicians who focus more on building the future than preserving the past. Accounting says nothing about the day after tomorrow.

— Noah Smith

Just a flesh wound

Speaking in the lower house's budget committee on Monday, Aso Taro said, "If you compare our economic conditions to other countries, our wounds are shallow."

Naturally I immediately thought of nothing so much as this:



I think Jun Okumura is on to something when he writes that the prime minister isn't a "total nincompoop," just in his own world.

After the latest opinion polls, he will no doubt retreat further into his private world.

But seriously, it is hard to square Mr. Aso's optimism with the bleak picture provided by analysts like Claus Vistesen at Japan Economy Watch — and the bleak reality that ordinary Japanese now face.

Naturally Mr. Aso is going to be optimistic. I would expect nothing else from him or any elected official, certainly not from a prime minister with an approval rating heading into the single digits. But maybe, just maybe, there might be some political benefit in acknowledging that Japan will not miracuously escape its recession, that Mr. Aso is remotely aware that life is hard and getting hard for his people. Of course, at that point he would also have to provide some plan to get out of the mess. Optimism, it seems, is a substitute for policy.

Given the haste with which Mr. Aso condemned the "Buy American" provision in the US stimulus package, it seems that Mr. Aso's economic recovery plan basically means buy time in the hope that the US somehow manages to restart its economy, preferably before September.

A twenty years' crisis

"Japan is an economy that is almost certainly producing well below its productive capacity - that is, the immediate problem facing Japan is one of demand, not supply. And it gives every appearance of being in a liquidity trap - that is, conventional monetary policy appears to have been pushed to its limits, yet the economy remains depressed. What can be done?"

So wrote Paul Krugman in his 1998 analysis of Japan's prolonged economic crisis, in which he argued that to escape its liquidity trap, it was necessary for "the central bank to credibly promise to be irresponsible - to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs."

Four years later, then-Fed governor Ben Bernanke, in his noteworthy speech on deflation, echoed Krugman, arguing "We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation" — but then concluded that Japan's prolonged crisis was not the result of ineffective monetary policy but reluctance on the part of political actors to implement structural reforms, reforms that, Krugman argued, may be necessary but would do little to "induce people to spend more."

A decade after Krugman, Japanese authorities are once again stuck trying to stimulate aggregate demand.

Economist Ikeda Nobuo, in considering Japan's sluggish aggregate demand, concludes, like Bernanke, that the high liquidity preference of Japanese households — nearly half of Japanese household assets are held in cash or low-risk, low-return bank accounts — is a response to inefficient Japanese companies. Pessimistic that the Japanese government is capable of stimulating Japanese demand in the absence of foreign demand for Japanese goods, Ikeda concludes that the lost decade never ended: Japan is in the midst of a "lost twenty years."

A group of fifteen LDP lawmakers, however, has decided to embrace Krugman's solution, calling for the government to run the printing presses, expanding the money supply by 50,000 billion yen independently of the Bank of Japan in order to finance further economic stimulus. The "Diet Members League to consider the issuance of interest-free government bonds and government money" will hold its first meeting on Tuesday, with upper house member Tamura Kotaro chairing. Former finance ministry official Takahashi Yoichi will address the inaugural meeting.

The group's motto is essentially "desperate times call for desperate measures." Acknowledging that running the presses has positive and negative consequences, the group believes that the economic situation is sufficiently dire to merit the risk of hyperinflation. Quoted in an FT article, Mr. Tamura clearly has read his Krugman: "We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it."

The new study group has drawn the opposition of senior LDP and cabinet officials. Yosano Kaoru, minister without portfolio for economic and fiscal policy, suggested that the government should issue more bonds instead of printing currency. Shirakawa Masaaki, president of the BOJ, insisted that the policy would do precisely what its proponents intend, namely undermine the credibility of his bank and the health of the currency. The heads of the LDP's factions were equally critical of the proposal, with Tsushima Yuji, the eponymous head of the Tsushima faction, likening the proposal to the enten ponzi scheme.

In other words, this is yet another policy upon which the LDP is divided and unsure of how to proceed, yet another sign of the governing party's flailing about in hope of finding some way to save itself (and Japan).

Not being an economist, I cannot say whether this group's proposal is appropriate. After years of weak domestic aggregate demand, it may be that only drastic inflation may be the only way to make Japanese spend at home — or demand less liquid assets with higher returns — no matter how politically risky it is for the LDP. Pensioners, already angry at the government, will presumably be no less angry as they watch inflation erode their fixed incomes.

But however appropriate the inflationary proposal, it may be beyond the power of the Aso government to implement. Whatever legitimacy the LDP-Komeito government had is now in tatters. The prime minister's latest misstep is to call for the revision of the postal privatization scheme, the very basis of the government's parliamentary supermajority. Mr. Aso questioned whether it is appropriate to divide the postal system into four companies, and stated that now is the time to revise the privatization scheme. He blithely stated that this position is wholly unrelated to the 2005 election that gave the government its mandate. Public opinion may have changed since 2005, but to backtrack now makes a mockery of democratic legitimation. If the government wants to revert from a policy that was critical to returning the coalition to power, it should have to go to the people and ask for approval to change course. (Nakagawa Hidenao made this argument at his blog, as did DPJ member Nagashima Akihisa.)

Naturally LDP proponents of postal reform have been quick to criticize the prime minister for his naked appeal to find some issue that will rescue his sinking government. (It bears noting that Mr. Aso has spoken of preserving the quality of postal services, a major concern of the public when it comes to privatization.) Koizumi confidante Takebe Tsutomu was perhaps the most succinct in his criticism: "What nonsense! I wish he would be more discrete in his speech."

In short, the prime minister is gradually losing whatever ability he has to rally his party and the public to an agenda. He is incapable of setting priorities or taking decisive action. The halls of power echo with rumors of plots to unseat him.

It is unlikely that this shiftless prime minister is capable of deciding on so risky and decisive a policy as proposed by the new league.

This prime minister, his party, and his government are bereft of authority and legitimacy — and they appear determined to drag Japan into the abyss with them.

As MTC so eloquently observes, hopefully Secretary Clinton will take heed of the stench of decay when she visits Japan later this month.

Aso calls for a new Japan

Prime Minister Aso Taro, having had his second stimulus package pass the Diet Tuesday, appeared before the Diet on Wednesday to deliver his latest policy address.

Rhetorically, the address contains few surprises. In the opening sections, in which Mr. Aso addressed the principles behind his policies. He spoke of the "once in a century economic crisis" (although he omitted the phrase "emanating from America"). In discussing the work of building a new society and overcome Japan's third major crisis in the past two centuries, he once again stressed the importance of the virtue of industry, of hard work. To ensure Japan's continuing prosperity, he said, "It is necessary to build a society in which hard work is rewarded, a society in which senior citizens, the handicapped, and women find it easy to work." The fact that he needs to group women with the elderly and the handicapped when talking about remaking the Japanese labor force speaks volumes, doesn't it? As before, when Mr. Aso speaks of the elderly working, he speaks of it as a virtue, as opposed to something that should be kept to a minimum. Once again he gives the impression of a coach giving a pep talk to the Japanese people instead of a leader who understands the hardships his people are facing today. And as the Japanese press has noted, Mr. Aso has joined in the anti-capitalism boom, marking an "about-face from the Koizumi structural reforms." (Of course, such talk assumes that the LDP has not already moved away from Mr. Koizumi's agenda, which it clearly has.)

After explaining his principles, Mr. Aso addressed policy specifics, making the case for a three-stage process in making his new Japan. Step one is short-term economic stimulus, as contained in the two 2008 supplementary budgets and the 2009 budget to come. Far from saving Japan, however, the measures come across more as treading water in the midst of a tsunami than as a carefully designed plan to make up for lost foreign consumption. Japan's fate may depend more on what's happening in Washington than on what's happening in Tokyo.

Having explained the government's stimulus plans, Mr. Aso proceeded to the next phase, the medium-term phase in which the Japanese government is to set its fiscal house in order. This phase entails both the introduction of a consumption tax increase from 2011 — depending on the health of the economy — and cutting waste by lowering expenditures on public corporations and cutting the number of bureaucrats. In a single line Mr. Aso also promised to shift all of the road construction special fund into the general fund, a policy question that readers will recall wore down Prime Minister Fukuda's resolve in spring 2008. He also promised to accelerate decentralization.

Finally, the medium- to long-term phase of Mr. Aso's vision calls for a "new growth strategy." At the heart of this plan is the creation of a world-leading "low carbon society." He also calls for Japan's becoming a world leader in medical care for the elderly and rebranding Japan as a country with beautiful countryside, world-famous pop culture and fashion, and delicious, safe food. Connected to this, he promised to introduce a bill during the current Diet session that will trigger the Heisei agricultural reform, with the goal of raising Japan's self-sufficiency in food production. Mr. Aso's plan calls for a shift from "ownership" to "use" of agricultural land. He also wants greater use of rice-based products and more production of wheat and soya.

Mr. Aso also promised to remake the Japanese welfare state, starting with the pensions system. He apologized for the still-unresolved pensions scandal while stating that the government is making steady progress in cleaning up the mess. He addressed concerns about the declining quality of medical care, promising an increase of doctors working in the public service. Near the end of the speech, he actually mentioned education reform, which may be the most important piece of any effort to rejuvenate the Japanese economy and implement a "new growth strategy." Mr. Aso celebrated the introduction from April 2009 of a ten-percent increase in the number of math and science classes and new restrictions on cell phones in schools, but he actually says very little in this section about reform to how Japan educates its children. After mentioning forthcoming changes, he devotes the rest of the education section to discussing the achievements of Japanese scientists and researchers. A serious plan for reforming Japanese economy and society would treat the education system as more than an afterthought.

Mr. Aso concluded the speech by discussing a three-pronged foreign policy based on the US-Japan alliance, relations with Japan's Asian neighbors, and the UN and other international organizations, in short an approach wholly consistent with Japan's foreign policy mainstream and not altogether different from the DPJ. Mr. Aso and Mr. Ozawa might emphasize different legs of the three-legged foreign policy, but the differences are less than meet the eye. Mr. Aso did speak at some length about cooperating internationally to promote freedom and prosperity and combat terror and piracy, but his appeal lacked the same spirit that his calls to promote an arc of freedom and prosperity once had.

Bringing his speech to a close, Mr. Aso took a swipe at the DPJ for slowing down the political process and dismissed the talk of pessismists, who he says ought to look back and see how Japan rebuilt itself after the war into the very model of a high-tech, culturally attractive society.

There is very little of note in this speech. After mentioning the need to make it easier for women to work (see above), Mr. Aso offers few specifics for how to equalize the Japanese workplace. He has no real solutions to reversing demographic decline. Education reform is given a passing mention. While Mr. Aso is right to emphasize the "rebranding" of Japan, starting in stagnant rural areas, he says very little about how this transformation will actually be achieved. As is typical of these policy speeches, the connection between policy inputs and the desired outcomes is more often assumed than explicitly demonstrated.

Mr. Aso seemed more willing to acknowledge the extent of the economic collapse facing Japan today, but he also seemed as defiantly optimistic as ever, convinced of Japan's ability to overcome all challenges.

It is possible, however, that the current crisis may be too much for Mr. Aso and his weary LDP.

Tax rebellion averted?

The LDP appears to have forged a truce in the incipient war over writing the timing of a consumption tax increase into law.

In the best LDP tradition, the LDP leadership has decided to muddle the message of the bill. The LDP has produced a draft with language that calls for implementing "essential legislative measures by 2011" for fundamental tax reform including the consumption tax, but also adds that the precise timing of said measures will depend on "the state of the process of economic recovery and an examination of trends in the global economy." The draft also calls for a two-stage increase of the consumption tax. Finally, it included language designed to appease the potential rebels by calling for appropriate measures to promote administrative reform and eliminate wasteful spending.

The LDP leadership hopes to secure a cabinet decision on the draft by Friday.

Amazingly, these minor edits appear to be sufficient to quell the discontent among the LDP's reformists. Said Nakagawa Hidenao in response to the additions: "The supplementary provisions cannot be said to be a tax increase bill; they are nothing more than instructional provisions." His fellow malcontent, Yamamoto Ichita, is less impressed with the compromise.

"Anywhere you look in the world," he writes, "there are no governments saying things like, 'Depending on the situation we will raise taxes after three years.'" He believes that far from being "merely instructional," the plan will appear to the public as a solid commitment to a tax increase, a tax increase that Mr. Yamamoto does not deny may one day be necessary but argues that for now is political and economic folly to discuss.

The compromise may be a way for the tax hikers to create a foothold; if the LDP somehow survives this year's general election and if the reformists are diminished by the returns, they now have a basis for going forward with a firmer commitment. Instructions now, substance later.

For the same reason, I wonder whether the Japanese press is declaring a truce in the tax rebellion prematurely. Mr. Yamamoto's response does not sound like someone who is content with the party's compromise — and I'm sure he's not alone. It may be that the rest of the reformists do not share Mr. Nakagawa's desire to accommodate the party.

Meanwhile, I think I am with Kono Taro on this debate. At his blog, Mr. Kono muses on the growing severity of the downturn and wonders why the LDP is wasting its time on whether to hike the consumption tax in 2011 — a time at which, he notes, the LDP may not even be the ruling party — when sales are falling, company debt is growing, credit is freezing, and manufacturing is shrieking to a halt. He assumes that another stimulus package will be unavoidable, and that the LDP should be doing all it can to stop the bleeding instead of debating whether to raise taxes once the economy recovers.

Before the deluge

After an abbreviated recess, the Diet will reconvene today for its 2009 ordinary session.

The situation facing Aso Taro, his party, and his country is dire, and growing darker by the day. The latest development is the tent village — is it appropriate to call it an Asoville or Aso-mura? — that has been growing in Hibiya Park, populated by unemployed temporary workers with nowhere else to go. From Monday the unemployed will relocate to four sites in the Tokyo area, but after next week it is unclear what will happen to them. Asahi reports that the denizens of the temporary village will be demonstrating at the Diet on Monday.

A crowd of unemployed workers sleeping in Hibiya Park, living on emergency food aid: it is with this backdrop that the LDP approaches what may be its final Diet session (for now) as Japan's ruling party.

Mr. Aso, in a press conference Sunday, did his best to remain positive, as is his wont. Far from heeding Franklin Delano Roosevelt's 1933 warning about "[denying] the dark realities of the moment," Mr. Aso insisted once again on speaking of a bright future while ignoring the ever bleaker present.

"The future," he said, "is built by us. We build. The future is bright...I want to build a bright Japan for all the people."

He insisted that the supplementary budget containing a second stimulus package must be passed before the end of the fiscal year. He repeated that he is not thinking about calling an election until the second 2008 supplemental and 2009 budgets are passed. He said that it is appropriate for the LDP to discuss a future consumption tax hike, following the restoration of economic growth. Finally, he concluded by saying that he is not worried about the possibility of rebellion by LDP malcontents, that he even understands their grievances.

It increasingly appears like Mr. Aso's anodyne remarks are intended not so much to reassure the public as to reassure himself. Perhaps it's working; maybe Mr. Aso really believes that a brighter future is right around the corner.

The reality, of course, is that it increasingly appears that not only will Mr. Aso preside over the continuing disintegration of the Japanese economy, he may also preside over a disastrous general election for the LDP and the disintegration of the LDP. Watanabe Yoshimi, the man in revolt, appears to be steeling himself for a break with the party. Speaking to his koenkai in Tochigi over New Year's, Mr. Watananbe told his supporters that he remains opposed to the government's two trillion yen payment plan and, moreover, that if the government does not continue to reform the bureaucracy — his pet issue — he is resolved to leave the party and place himself at the head of a popular movement. It remains to be seen whether Mr. Watanabe is bluffing. I'm inclined to believe he's not. Indeed, it appears that Mr. Watanabe may be setting the table so that it appears that the Aso government is to blame for his leaving for failing to accept his conditions (including an immediate dissolution of the lower house followed by a general election). The pertinent question then is whether anyone will follow him out of the LDP, or, failing that, whether a popular movement will materialize around him.

Unfortunately I'm pessimistic about both. The LDP's would-be defectors appear to have been sufficiently restrained by the party, at least until after a general election. As for the other alternative, would Mr. Watanabe be able to repeat Hosokawa Morihiro's feat of channeling popular discontent into a new micro-party that could propel him to power? Mr. Hosokawa's Japan New Party formed in 1992 and competed in upper house and local elections before the 1993 general election. Mr. Watanabe will have far less time. Would he be able to find enough candidates, not to mention enough field supporters, to make his movement into a factor in the post-election landscape? The presence of the DPJ will further complicate matters, potentially dampening enthusiasm that might otherwise have bolstered his movement.

In the meantime, Mr. Watanabe — along with Nakagawa Hideano and other reformists — will continue to agitate from within the LDP. Mr. Nakagawa began the year by declaring his belief in the need for a political realignment, and rejected all talk of a consumption tax hike. Discontent within the LDP will only grow in the coming months, whether or not Mr. Aso is prepared to address it.

Ozawa Ichiro is undoubtedly heartened by the news surrounding the start of the new Diet session. He reasserted the importance of putting the people's livelihoods first and, in a deft move, criticized both the government's delay in introducing a new stimulus package and the content of the stimulus package on offer. His point that a new stimulus package should reflect the DPJ's concerns too is a salient one, if only because the DPJ, as the master of the upper house, should be involved in the drafting of such an importance piece of legislation. The LDP still has not learned that the divided Diet means that consulting with the opposition should occur before the introduction of legislation. Of course, doing so would probably mean cutting side payments to important LDP and Komeito constituencies. (But the DPJ is the only party playing politics with an issue of national importance...)

Mr. Ozawa also voiced his approval of Mr. Watanabe's remarks before launching into an extended criticism of Mr. Aso's remarks. Addressing Mr. Aso's declaration that the key words for the Diet session are "security" and "vitality," Mr. Ozawa said, "While saying these words, the true figure of the Aso government is that by doing nothing for three months it created a political vacuum. I think the people really understand this. Therefore it's impossible for the people to be deceived by this word play."

In response to a question from a journalist, who wondered why Mr. Ozawa is spending so much time on rural districts, Mr. Ozawa reasserted the importance of the DPJ's campaigning in longtime LDP strongholds in rural Japan. He believes that the DPJ's message of opposition to market fundamentalism, competition, and the inequalities "that have resulted from globalization" can succeed across Japan — although he declined to offer specifics for what the DPJ is promise in place of these enemies.

For now, however, it seems that the DPJ will not be penalized for doing little more than campaigning on the basis of the insecurities, the grievances, and the anger of the Japanese people. The DPJ is setting the public agenda; the LDP is now talking of "protecting the people's livelihoods," not unlike Mr. Ozawa's "The people's livelihoods first." The party owns the issues that matter most to the public, and as the economy worsens may even appear to be a reliable steward of the economy compared to the LDP.

The DPJ should not be too upbeat. If current trends continue and if the DPJ wins this year's election, it may come to regret taking power thanks to a historic economic crisis that appears far from finished in Japan, not to mention everywhere else.

Slouching towards irrelevance?

Prime Minister Aso Taro, faced with dismal poll numbers, a potential rebellion within the LDP, and an economy galloping into recession, sought to stem the tide against him by announcing a second stimulus package at a press conference on Friday.

The government's purpose is to ease the insecurities of the Japanese people, but also to make Japan "the fastest among the developed countries to escape the current recession." To that end, Mr. Aso promised ten trillion yen (around $109.7 billion) in countermeasures for employment and business finances, including one trillion yen in residence and capital investment taxes. He promised thirteen trillion yen (around $142.7 billion) for shorimg up the financial system.

On employment, he focused particular attention on the plight of irregular and part-time employees, promising to create employment opportunities in rural areas. He pledged that the forthcoming budget will offer assistance to these workers in finding new employment, and will increase subsidies to local governments by one trillion yen in order to promote job creation.

The new plan's assistance for financial institutions adds an additional ten trillion yen to the two trillion included in the assistance bill that just passed the Diet, with an eye toward encouraging banks — particularly banks in rural areas — to resume lending to firms, especially small- and medium-sized enterprises.

But the impression one gets is that Mr. Aso's latest plan is lots of trees, no forest. Coverage has focused on the sheer scale of the package, although it's not clear just how much the second stimulus package will total, because the prime minister was unclear which figures are totaled in other figures and which constitute separate categories of spending. If other governments are improvising their responses to their respective economic crises (as argued by John Gapper in the Financial Times), Mr. Aso's approach seems to amount mostly to throwing ideas against the wall in the hope that something sticks. For all the pieces of the new plan, it amounts mostly to hope: hope that the government's subsidies for local governments will create more jobs, hope that banks will start lending upon being shored up by government funds, hope that tax cuts can get businesses and homeowners investing again. It is unclear how the government plans to stimulate consumer demand to replace slack demand from abroad — demand that is unlikely to return anytime soon if the yen stays as strong as it is for any considerable length of time.

It's all well and good that Mr. Aso appreciates the importance of saving rural Japan and preventing the emergence of yet another lost decade, but perhaps the time to do that was in the "longest postwar expansion." Now, in the midst of what government officials repeatedly call "the worst crisis in a century," it is uncertain whether fiscal policy will have any effect whatsoever. It certainly won't in time to reverse the downturn before the LDP has to face the voters. The government faces the monumental task of solving Keynes's paradox of thrift, getting the public to spend at the same time that it is bombarded with bad economic news that has the effect of discouraging consumption.

There's also the question of how the government will pay for its new commitments. The prime minister insisted that the government will not depend on bonds to cover the new stimulus, turning instead to the unemployment insurance special account and the Fiscal Investment and Loan program (FILP). But the tax question will not go away. This is hardly the time for the LDP to increase taxes, and it's understandable that Mr. Aso is reluctant to commit to a date for comprehensive tax reform and a consumption tax increase. Doing so can only worsen his political prospects. Why should he commit to a tax increase in 2011 when he may not even be prime minister, considering that he could suffer political consequences in 2009 as a result of his pledge? (Yosano Kaoru, his economy minister, is reportedly outraged at the prime minister's inability to commit.)

The government has little choice but to throw caution to the wind in the hope that somehow, miracuously, the economy recovers. Not to reopen the debate about whether Japan or the US is in worse straits, but Japan truly appears to be teetering on the brink of disaster. I don't mean merely another lost decade or a depression. I mean slouching to irrelevance. Another prolonged downturn could mean another lost generation, with questionable job prospects and correspondingly low ambition. Another lost generation will only compound Japan's demographic crisis. Fewer steady jobs presumably means fewer Japanese getting married and having children. Hokkaido University's Yamaguchi Jiro, writing about the employment crisis, argues that it's essential for Japanese to reconsider the meaning of work. True, but will that reconsideration happen in time to rescue Japan?

This is the great failure of the Aso government. Faced with a widespread and deepening crisis, the government has offered a cobbled-together plan that may only entail suffering firms to limp on until the next crisis. Mr. Aso has not, however, offered a compelling intellectual framework for a post-crisis Japanese economy. Rural Japan is in desperate need for some scheme to ensure future prosperity — public works and agriculture will no longer suffice. Perhaps it's too difficult a question to ask of the government when it is simply trying to stanch the bleeding, but at some point the government (or a government) will have to answer it.