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No. 17 — April 28, 2000

Feature Article

JAPANESE FISCAL POLICY IN FY 2000: A LAST HURRAH FOR STIMULUS?

Jon Choy

Summary

In the 1990s, successive Japanese cabinets attacked the domestic economy's ills using a tried-and-true approach: compensate for flagging private-sector demand by expanding budgets for public works projects and implementing targeted tax breaks. Politicians believed that pump-priming was effective both economically and politically — not-insignificant considerations during a decade of discontent — and so fiscal stimulus was their tonic of choice.

As the final decade of the 20th century unfolded, however, it became increasingly apparent that the large sums of money being thrown into public works were not producing the desired macroeconomic result. Growth remained anemic despite a string of record-setting stimulus packages. Chastened by this experience and envious of the booming U.S. economy, political, bureaucratic, business and academic leaders grudgingly realized that Japan's corporate, financial and regulatory structures needed to be reformed and updated so that new industries and economic activities could take root and thrive.

This epiphany, however, by no means relegated fiscal policy to the dust bin. As Japan entered the new century, the cumulative effects of Tokyo's decade-long spending spree coupled with restructuring and deregulation began to show results in the form of positive — if hesitant — economic growth. The government's spending and tax plans for FY 2000 were crafted to at least maintain the momentum of public works spending established the previous year.

Although it is not yet certain that the economy is back on a sure growth track, the debate already is shifting to address the ballooning national debt created by a decade of pump-priming. The impending elections for the Diet lower house make it an impolitic time to propose new or increased taxes. Nevertheless, tax policy is coming to the forefront as a two-pronged tool to boost economic activity while also holding down the debt. Wary of repeating the April 1997 mistake of raising taxes before solid growth was established, a decision that pushed the economy back into recession and contributed to the downfall of a prime minister, policymakers are considering very carefully their near-term as well as long-range options.

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Weekly Review

BANK OF TOKYO-MITSUBISHI JOINS MERGER STAMPEDE
--- by Douglas Ostrom

The April 19 announcement that Bank of Tokyo-Mitsubishi, Ltd. — Japan's biggest and healthiest financial institution — would combine with Mitsubishi Trust & Banking Corp. under a holding company framework as well as the April 21 release of additional details concerning the pending merger between Sakura Bank, Ltd. and Sumitomo Bank, Ltd. shed further light on the motives behind the ongoing restructuring of Japan's banking industry (see JEI Report No. 12B, March 24, 2000). Public explanations have attributed the tie-ups to the desire to cut costs and create synergies in the introduction of new products. However, the more significant factor appears to be purely defensive and involves preventing interlopers, foreign and domestic, that otherwise could obtain relatively cheap admission to the banking business from moving into the market and constraining the efforts of Japanese financial institutions to improve their anemic profit margins.

 

STOCK MARKET'S VOLATILITY THROWS JAPAN FOR A LOOP
--- by Jon Choy

For seven days beginning April 14, investors around the globe were reminded that what goes up must come down. That day, high-flying U.S. equity markets felt the force of gravity with a vengeance. The three key indexes suffered record-breaking single-day point losses as waves of sell orders sent all types of stocks south. True to form, once American markets caught the "bug," Asian markets "sneezed" on their first subsequent day of trading, with national stock market indexes across the region registering big declines April 17. Although the volatility of Japan's stock markets was amplified by a structural factor, observers warned that investors there were in for a bumpy ride. Ongoing changes in the nation's financial services sector and business world are opening up new investment opportunities while, at the same time, exposing stock prices to a broader spectrum of influences.

 

JAPAN, NORTH KOREA RESUME NORMALIZATION TALKS; SEOUL, PYONGYANG AGREE TO MEET
--- by Barbara Wanner

Tensions in Northeast Asia may begin to ease as a result of two recent diplomatic breakthroughs — but not without considerable effort by all sides to address long-standing and deep-seated disputes. After a shaky start, Japanese and North Korean negotiators meeting in Pyongyang April 5 through April 7 wrapped up the first round of discussions since 1992 aimed at normalizing ties. Their brief concluding statement described "sincere discussions over various pending issues, led by 'settlement of the past,' in relation to realizing the normalization." However, the fact that language referring to Pyongyang's pet demand for reparations for Japan's harsh 1910-45 colonial rule of the peninsula made it into the communique while Tokyo's top priority — getting action on North Korea's alleged abduction of at least 10 Japanese from northeast Honshu in the 1970s and the 1980s — did not suggests that negotiators face a rough road ahead.

 

MORI WORKS TO BOOST TIES WITH SOUTH PACIFIC
--- by Marc Castellano

Prime Minister Yoshiro Mori, making his first diplomatic appearance since succeeding Prime Minister Keizo Obuchi in early April, met April 22 with the leaders of the 16 nations of the South Pacific Forum at the second Pacific Islanders' Meeting, or PALM 2000, to discuss ways to boost cooperation. The highlight of the session, convened in Miyazaki on Kyushu, was Mr. Mori's announcement of an aid package worth roughly $4 million. The prime minister and South Pacific Forum leaders also released a declaration that spelled out a "common vision on tomorrow's Pacific." However, they were not able to reach agreement on the key issues of climate change and nuclear fuel shipments.

 

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