In launching “100 Actions” Creating a Vision of Japan, I first presented a list of Basic Principles, the second of which was “Economic Growth through Creativity and Change.” We should be reminded that national power is founded on a strong economy. Without a strong economy, it is not possible to successfully manage the affairs of the nation in a sustainable fashion.
Weakening of the economy sets off a vicious cycle in which industries decline, jobs are lost, tax revenues drop, government finances collapse, and investment in R&D and human resources are reduced.
The only way to solve the problems confronting Japan today and restore the nation to a virtuous cycle is to use economic growth to drive the resolution of the fiscal deficit and the problems of the social security system. To put it very bluntly, I can say without reservation that unless the economy begins to grow, many of Japan’s most serious problems are here to stay.
The question of course is how to generate growth in the economy. Japan’s recent administrations have given an answer that is completely wrong. That is, economic management has been based on a set of totally erroneous principles.
Past administrations attempted to generate growth by focusing on fiscal spending to stimulate the economy. To use a common analogy, this is like giving the patient a drug, which creates a momentary sense of well-being. Giving the patient repeated drug exhausts both the body and the spirit and ultimately worsens the illness. At the same time, the government eventually runs out of the money it needs to give the economy temporary relief.
When the economy (the patient’s body) is steadily becoming weaker, it makes no sense to opt for short-term stimulus measures. What is needed is fundamental improvement in the physical constitution of the patient. The problem with short-term stimulus measures is that, in the best case, they have no positive impact on achieving fundamental improvement. In the worst case, however, they are counterproductive. With holistic approach, once fundamental improvement is achieved and the body is restored to health, fully energized and autonomous growth can be enjoyed without having to resort to any type of external stimulus.
The following three measures are necessary in achieving this fundamental improvement.
Use economic partnership agreements and free trade agreements to build a nation that is fully open to the world and an economy that engages in the free and unhindered exchange of human resources, goods, capital, knowledge, technology, and information with the rest of the world.
Capitalize on the significantly expanded market and economy created by the above measure to revitalize economic activities in Japan by making Japan more attractive place to do business in.
- Pursue thorough deregulation, encourage the entry of new competitors, maximize private-sector initiative by promoting startups and innovation, and promote industrial renewal by creating new businesses while allowing weak ones to fail.
Fundamental improvement cannot be achieved by protecting the old and decrepit cells of the body. The key to success is actively allowing the demise of these cells while working to build new ones. In the human body, hundreds of millions of cells die and hundreds of millions of new cells are born every day.
This metabolic process of death and birth can only work if we allow inefficient businesses (cells) to die, making way for the birth of new businesses (cells). In this way, employment and investment (life blood of the economy) can be redirected to new industries (cells). It is this process that can ensure the emergence of a sound economy (body) and serve as a source of growth. Maintaining unhealthy cells can lead to the growth of cancerous cells and other mutations that will eventually undermine the entire body. Zombie-like cells (businesses) must be led to the exit, and new cells (businesses) must be born and nurtured.
I have already discussed some of these three points that are needed for achieving fundamental improvement -- economic partnership and free trade agreements, increasing Japan’s attractiveness as an economic base, and deregulation and startup businesses.
Japan must implement these three points. Specifically, a definite end must be put to the relief measures and vast amounts of subsidies that continue to be expended on protecting inefficient small- and medium-sized enterprises and zombie businesses. Japan needs to thoroughly open itself to the world and pursue deregulation to encourage the entry of new businesses and promote the process of industrial renewal.
It is the combination of these actions that will make the achievement of fundamental improvement possible. Although this may be a time consuming process, we must attain the fundamental improvement that is so vital to Japan’s long-term economic growth.
Most of the measures that I have mentioned were launched under the Koizumi cabinet’s Minister of State for Economic and Fiscal Policy, Heizo Takenaka. While considerable success was being achieved, the attendant pain proved too much for vested interests. Consequently, immediately after the resignation of Prime Minister Koizumi, these vested interests began to exert tremendous pressure on the government to scuttle the process of reform that was still midway toward fruition.
It is most regrettable that, responding to these pressures, the government changed its policy course. If later administrations had persevered in the path toward reform, much greater progress would have been made by now in attaining fundamental improvement in the Japanese economy.
Today, Japan is faced with very difficult social and economic challenges that originate in the problem of declining population. In addition to this, Japan finds itself shackled by the Six Burdens caused by policy inaction, which are: high corporate tax rates, obligations to cut CO2 emissions under the Kyoto Protocol, problems related to labor practices, high value of the yen, delayed conclusion of FTA and EPA agreements, and shortage of electrical power. These six problems have combined to even further reduce Japan’s economic vitality.
At this point, the greatest priority in realizing fundamental improvement is to remove each of these six shackles and to take effective action for making Japan a more attractive destination for economic activities.
1. Fundamental Resolution of Six Burdens
(a) Lower Corporate Tax Rates
To make Japan more attractive as a base for economic activities, it is essential to lower the effective corporate tax rate from its current level of approximately 40% to the standard international level of 25 to 30%. Based on the New Growth Strategy of June 2010, the cabinet did approve a reduction of about 5% in the corporate tax rate in December 2010. However, this decision was shelved after the Great East Japan Earthquake. The first step would be to implement this decision without delay.
The often-repeated argument against lowering corporate tax rates is that the government has no way to cover the decrease in tax revenues. In my opinion, this argument has it all backwards. That is, I am predicting the opposite: lowering corporate tax rates will result in higher tax revenues over the medium to long term. Suppose the corporate tax rate is lowered to 30% from 40%. This will increase the after-tax net income of corporations by 10%. Theoretically, stock prices will rise by the same rate. Furthermore, Japan will be able to attract more investment by making itself more attractive as an economic base. The simplistic formula that lower corporate tax rates will lead to lower tax revenues is just not believable.
The most important challenge is to make Japan more attractive place to do business in so as to draw more factories, investments, and human resources to this economy, and to thereby increase the intensity and speed of economic activities. Our neighboring country of Korea has used similar methods to successfully entice Japanese businesses to move their factories there. Unless Japan adopts comparable measures, our neighbors will attain even greater competitive advantages over us.
(b) Attain the equal footing with Asian competitors; by not extending Kyoto Protocol Obligations
Why is it that in all of Asia, Japan is the only country with obligations to cut CO2 emissions? Today, Japan’s primary competitors are Korea and China. Korea has made no commitment to reducing its CO2 emissions. China benefits from Japan’s commitments by receiving hundreds of billions of yen per year from Japan in emissions trading.
In last year’s Cancun Conference on Climate Change, Japan rejected the simple extension of the Kyoto Protocol. Japan must maintain a firm position on rejecting simple extension. It is clear that CO2 emissions must be reduced for the sake of our global environment. However, it is also very clear that Japanese industries will be weakened unless they are allowed to compete on an equal footing with Korean and Chinese industries.
(c) Labor Practices
Japanese labor practices are the most rigid among all advanced industrialized countries. Workers cannot be fired, and there is every indication that additional regulatory limitations will be placed on various forms of contract workers and the employment of dispatched workers. I will discuss this in greater detail in the “Action” on the Ministry of Health, Labor and Welfare. Suffice it to say that if rigid labor practices are not eliminated, Japan will definitely experience further stagnation in economic activities as well as further reduction in employment.
(d) High Yen
The value of the yen has risen too far. If Japan fails to respond to this problem, the hollowing-out of its industries will be accelerated. Deflation is one of the leading causes of the appreciation of the yen. However, deflation cannot be slain overnight. Deflation will not go away until the economy is reactivated by implementing the fundamental improvement advocated in this Action.
However, there is another issue that is as serious as the problem of deflation, and that is the question of whether or not Japan has a foreign exchange policy. It is obvious that both Korea and China have policies in place to keep the value of their currencies low.
On the other hand, the Japanese government has absolutely no foreign exchange policy. As if to ridicule this do-nothing stance, the yen continues to climb. The first action to be taken is for the government to engage in serious internal discussion on what is really important for Japan and to formulate clear guidelines. There is absolutely no message conveyed by the frequently repeated statement of “We will maintain a close watch on market developments.”
The economy cannot develop and jobs cannot be created without the steady growth of businesses. The aim must be to ensure that businesses choose to locate in Japan, which means that they will undertake plant and equipment investments in Japan, engage in R&D activities in Japan, and recruit and train human resources in Japan.
So, what must be done to make sure that Japan is chosen as the base for such economic activities? First of all, the government must pay greater attention to the voice and demands of the business community. Second, the government must show that it is prepared to act with determination to resolve the Six Burdens that the business community has been screaming about.
Conveying a resolute stance is an extremely important element in Japan’s effort to communicate its intent to the world. Convey a strong sense of commitment and follow this up with a steady step-by-step implementation of policy measures: this is the only way to augment Japan’s attractiveness as an economic base. The two years that Japan has spent under the rule of the Democratic Party of Japan and the Hatoyama and Kan Cabinets have been absolutely terrible. The only result gained from antagonizing the business community has been to accelerate the vicious cycle of diminished employment.
2. Implement Other Measures for Increasing Japan’s Attractiveness
(a) Bolster Human Resources Development
To make Japan more attractive place to do business in, Japanese education must be bolstered as a supplier of quality human resources. There are numerous things that must be done in the area of education to effectively raise the quality of labor, but the most urgent challenges are the following: strengthen English-language education, enhance and expand higher education, improve professional skills, and nurture entrepreneurship and the ability to act on entrepreneurial instincts.
(b) Steady Implementation of Economic Growth Strategy
We have been made to witness a very strange and unfortunate phenomenon in recent cabinets that have stood at the helm of the nation. Sure enough, economic policies (including the New Economic Growth Strategy) are duly formulated. But before there is a chance to implement the decisions, the prime minister resigns and a new administration is ushered into office. This has occurred repeatedly.
To ensure greater continuity and implementation of policies, a fully empowered command center should be created, tasked with the mission to comprehensively formulate, implement, and review policies from a medium- to long-term perspective. One option would be to include the Liberal Democratic Party and the New Komeito in the Council on Economic and Fiscal Policy. Another possibility would be to create an agency patterned after the US National Economic Council.
(c) Revise the Antimonopoly Act
Japan must promote the process of industrial renewal where old businesses are being constantly replaced by new businesses. An equally urgent challenge is to create businesses that are profitable and large enough to be successful in the global battlefield.
This means two things. First, put an end to long domestic wars of attrition that are born out of the environment of excess competition. Second, promote M&A as an effective means to reorganizing industries. To achieve these goals, it is necessary to review and to revise the Antimonopoly Act (increased transparency in examination procedures and standards, easing of standards, streamlining of examination procedures).
As I have emphasized here, it is vitally important to make Japan more attractive places to do business in and to create an environment that will allow Japanese companies to compete on an equal footing with their global competitors. If we fail to do this, the inevitable result will be the gradual decline of the Japanese economy and the continued loss of jobs.
To repeat what I said at the outset, national power is founded on a strong economy. And where a strong economy is absent, national affairs cannot be successfully managed in a sustainable fashion. Thus, political determination and strong leadership for transforming itself into highly attractive places to do business in are strongly needed.© Japan Today