Richard Katz
Richard
Katz is Senior Editor at The Oriental Economist Report, a
monthly English-language newsletter about Japan and a special correspondent
for Shukan Toyo Kezai. An American national, Mr. Katz has
reported on Japan-related issues for over two decades for the printed
press, including Diamond Weekly, one of Japan's leading business
magazines.
He is author of the widely read book on US-Japan economic relations,
Japan: the System that Soured (1998), published in Japanese
as Kusariyuku Nihon to iu System (1999). His latest book
is Japanese Pheonix: The Long Road to Economic Revival (2002),
published in Japanese as Fushicho no Nihon Keizai (2002).
As a Visiting Lecturer in Economics, he taught a course for several
years on the postwar Japanese economy at the State University of
New York (SUNY) at Stony Brook.
Mr. Katz received his B.A. in History from Columbia University in
1973 and his M.A. in Economics at New York University (NYU) in 1996.
His M.A. thesis, entitled From Growth Superstar to Economic Laggard,
predicted Japan's current economic travails and formed the basis
for his book, Japan: The System That Soured.
Interview: December 6, 2001
Let's
start with a softball question...
Okay, but I don't know much about softball...
Your personal bio suggests that have been writing about US-Japan
issues for over 25 years. Assuming that you couldn't foresee the
end of the Cold War, why didn't you focus your energies on the "hot
area" such as the Soviet Union or its communist satellites?
It was a complete accident. Like Christopher Columbus, I got lost
on my way to Asia and ended up in totally different place.
I was at Columbia University during the Vietnam War and was part
of the anti-war movement, like every other red-blooded American
student. I decided that I should take some courses on the region
to learn something about the context, but there were no courses
on Vietnam. So I principally took courses on China and Japan.
I knew nothing about Japan except that—this will show my age,
by the way—when my parents bought me a Japanese toy it would
then break two days later. A seminar taught by Paul Varley changed
all that; it was the most fascinating country I ever heard of—the
similarities between European feudalism and Japanese feudalism,
its industrial development, the Meiji era. . .the drama of the thing.
And then the US-Japan trade frictions were beginning to heat up
and I was lured in against my original intention...so it was a total
accident.
Your most well known work is your book, Japan: the System
that Soured (1998). For people who may not be familiar with
it, perhaps you could quickly go over its conclusions?
In 1997, the consensus was that Japan had gone through a bad patch
following the collapse of the Bubble economy and that it was over.
1995-6 had looked like great years: people were beginning to write
things like "Japan is Back," and even the notorious book about How
Japan Will Overtake the US by the Year 2000 [eds:
Eamonn Fingleton's "Blindside" (1995)] was treated seriously.
I had reached a very different conclusion: Japan was in deep, deep
trouble that would last for at least another five years, but no
more than twenty. I now think this will be much shorter; about ten
years from now because things are unraveling and developing much
faster than I had expected. Added to this, I thought that Japan
would not be able to solve these problems without undergoing some
very thorough structural reform.
Also, I was very troubled about the debates in the US about Japan.
I thought both sides were wrong. On the one hand, there were the
"revisionists" who in certain ways were descriptively correct. They
believed that Japan used industrial policy to develop, but were
so antagonistic to Japan that I rejected their thesis. On the other
hand, there were the "traditionalists" who, in defense of the US-Japan
alliance, just denied things that I thought were rather obvious
about Japan's history.
To the extent that there is any originality, I tested this theory
that a distinct Japanese system actually existed and that it had
accelerated growth during the "catch-up" period of the 1950s through
the '73 oil shock. I also examined whether or not Japan was able
to change the system sufficiently after the 1970s when Japan became
a mature economy, or whether industrial policy dragged the economy
down. I ran some regressions that showed, in fact, that Japan- when
you plug in all to those things that make countries grow—it
grew faster than you would have expected in the high growth era
and much slower than you expected. In the 70s and 80s when people
thought Japan was doing better-it wasn't.
After popping the bubble, Japan's problems were much more deep seeded
than people had previously thought. Essentially, after years of
hardening of the arteries, they had the heart attack in the 1990s.
So both these traditional theories were really wrong.
One criticism of your book is that it doesn't exactly read like
stereo instructions. How does one go about fixing the Japanese economy?
Ah hah! [laughs] Buy my next book!
Well, then tell us a little about it.
I don't have a title yet, but it will be something along the
lines of "The Long and Winding Road to Reform"-- the Paul McCartney
route. Hopefully, it will be coming out next year.
How about a specific action plan. . .
Sure. You have to fix an emergency situation and do a total
overhaul.
First, you need a macroeconomic safety net. As you have a microeconomic
shift through structural reforms, you will cause millions of people
to lose their jobs and move into other industries. . .how do you
get from here to there? If there are no new jobs to absorb them,
you have a macro-economic implosion like in Eastern Europe. And
that's a problem for a big country like Japan that can't export
its way out of a problem.
You also need fiscal stimulus to expand household demand -and that
should be tax cuts, not more bridges to nowhere. And tax breaks
for housing. Japan needs bigger and better housing. That stimulates
all sorts of ancillary things. You need a macroeconomic policy as
well, although monetary policy by itself—inflation targeting,
all those things—are a chimera by themselves.
If I could interrupt: the Ministry of Finance (MOF) would probably
criticize this view already. Fiscal stimulus, in conjunction with
tax cuts, will require funds that the central government currently
doesn't have due to a falling tax revenue base (click
here for further details on Japan's current tax situation).
To increase fiscal stimulus as a means of expanding household demand,
one needs to issue more government bonds, thus expanding the current
ratio of debt to retained tax revenues from its already high multiples
(click here for further
details on Japan's deteriorating fiscal balance). What's your
analysis of the Japanese bond market and more importantly, the foreign
credit rating on Japan's national debt? More downgrades? And do
these downgrades matter?
US and Britain came out of WWII with much higher debt to GDP ratios
than Japan. Britain had three time GDP, and I forget about the US,
it may have been as much as two times or two and a half. Bond markets
digested these because they were seen as temporary. The problem
in Japan is, as you say, if you issue more bonds when your tax base
is declining the national debt expands. Tax revenue is 20% below
what it was ten years ago, with is no wherewithal to pay them.
If you use deficits as a way to avoid reform, as heroin to kill
the pain, versus anesthesia for the surgery, of course the bond
markets will not digest it. If, on the other hand, you are using
it to create a breathing space to create a safety net for reform,
which will raise real growth, and therefore the tax base down the
line in five or ten years instead of issuing new five or ten year
bonds, I believe the bond market will digest it. So it depends on
how the deficits are used. Quite frankly, why anyone would trust
the MOF geniuses that gave us the 1997 consumption tax hike is beyond
me.
You mention that the current ratio of debt to retained tax revenues
in Japan is similar to the British experience coming out of WWII,
suggesting things can easily change in Japan. In fact, the situation
seems quite different. The UK government took active steps to regain
fiscal balance from 1948-72, including doubling the rate of corporation
taxation, and raising effective personal income taxes to over 90%
for its wealthy individuals, while not having to worry about a declining
labor force. As a result, the UK's ratio fell quite quickly.
In contrast, Japan's ratio continues to worsen thanks to a number
of factors increasing pressure on national finances: the prolonged
economic slump is reducing tax revenues at the national and local
levels, coupled with the mounting pain for worsening social security
costs and a declining labor force. Hence, the actions of the MOF
with regard to the 1997 consumption tax hike; the Ministry worries
about the prospects for not only paying back the principal on debt,
but also servicing the debt itself. Can you think of any warning
signs that the bond market will not digest expanding multiples?
Lower bond yields? Further downgrades by Moodys'? What do you consider
more important?
I spoke to Moodys' about this issue. I asked, "What would your
rating be on Japanese sovereign debt should the government conduct
wide-sweeping structural reforms at the same time of issuing further
debt?" They answered favorably.
This is why I think that in addition to macroeconomic stimulus,
the second thing, in order, is that you've really got to fix the
banking problem, or else nothing will be done. Japan is about to
become only the fourth among rich industrial countries to have a
five-year period with negative growth. The previous three were Sweden,
Finland, and Switzerland all suffered banking crises in the 1990s.
They did not resume growth until they tackled their banking problems,
and now they are growing quite well. Switzerland is interesting
in that it is similar to Japan with a dual economy with efficient
sectors, sheltered domestic sectors, a banking crisis, and mismanaged
fiscal policy. So you got to deal with Japan's banking crisis. That
will require a lot of money when two to four million people lose
their jobs, and for a capital injection in these conditions. Also,
bad borrowers who cannot pay their debts will have to be liquidated.
And then you need long-term structural reforms to increase efficiency
and a household share of national income. So for example, in the
political area you need electoral reform, which would give the urban
population its due weight in representation, you need competitive
politics-Japan is the only remaining one party state remaining in
the industrial world and without competition you don't get progress.
On the financial side, the Big Bang made some progress but its been
more than outweighed loan guarantees, the growth of financial socialism,
that is the state share of loans and deposits. In the area of labor,
you need more mobility, in the area of corporate reform you need
the ability to engender new firms. The rate opening and closing
of firms is the lowest in the OECD, and about half of the total
factor productivity comes not from firms getting better but from
inferior firms getting replaced by newer better firms. And so the
inability to both close and open new firms in Japan is a major problem.
From the sounds of it, it almost like you are describing a banana
republic.
What Japan? Not at all. The tragedy of Japan is the fact that
the problems are so eminently solvable. We're not talking about
Poland, we're not talking about Indonesia. We're talking about a
rich industrial country filled with talented, ambitious people that
is caught in a straitjacket of obsolete institutions and practices,
and mindsets. It's actually pretty easy for economists to design
blueprints to solve the problem. The fact is, the longer they wait,
the more painful it is to do the cure. And that's a problem. But
it is eminently curable, and the real tragedy is that they waited,
they haven't, and got themselves in such an unnecessary mess.
You seem to be an optimist to think that it could all happen
at the same time.
No I think that even if Japan did everything right today, we
would not see revived growth for five years-that's how serious the
problems are. But they won't do everything right today. So we are
looking at a ten year process—one that will be a bumpy and
ugly process.
You've laid out a plan-but here we have a "reform" government
under PM Koizumi which has essentially done nothing. What will be
the catalyst for reform? What will ultimately force the hand of
the central government?
It's not going to happen now. Koizumi is essentially a Gorbechev
like figure in that he is a product of the old system-making a valiant
effort to reform itself. And it can't. Just like the communist part
was not able to be the vehicle for reform in the Soviet union, the
LDP is incapable for being the vehicle for reform in Japan, no matter
who stands at it head. The LDP will have to split and that will
be the main catalyst for reform. What you need are new institutions,
and before that you need is a grand nemawashi in which you build
a consensus that reform is needed. That's part of the process we
are in now.
These things have a rhythm, and a time process, forwards and backwards-all
countries see it this way. And in some ways Koizumi is giving reform
a bad name, by this very counter productive fiscal policy he's got.
So he may be replaced by someone more conservative-these things
have these back and forths. And so more dashed hoped, more raised
expectations, and finally, I think the Japanese people would love
it if the LDP was the vehicle for reform. They are comfortable with
the LDP, but they yearn for reform, which is what Koizumi reflects.
Maybe the LDP will split-maybe he will have a showdown with the
dinosaurs and that will provoke the split. I mean you can't predict
how exactly these things will happen but there will be two things.
One is the consensus between the elite and the street that reform
is needed. You also need leadership-some one to say "this is what
the other side of the tunnel looks like, and you can go through
it" and you need an institutional vehicle. And the LDP isn't it
and the Minshuto is pretty pathetic, and it may well be new parties
you don't know and new personalities.
How do you achieve this sort of new leadership and nemawashi
consensus building when a new book by Edward Lincoln, Arthritic
Japan, hypothesizes that the vested interests in Japan could
be well over 50%? (Click
here for further details on Lincoln's estimated breakdown of the
vested interests in the existing economic system.)
Well they are, but many revolutions are often prompted by conservative
motivations. The American Revolution was certainly that-its purpose
was not to create something new: it did. But it was an unintended
side effect. It was to preserve their existing liberties that were
taken away.
The standard of living that the Japanese people have taken as a
birthright is being taken away from them. The baby boomers are now
going to support parents that they never expected to support because
their pensions are disappearing, their income from savings are disappearing,
and they are having to support the Free-tas [eds—usually young
workers who drift through a variety of part time jobs with little
or no benefits] because the post college jobs are not there. And
so the things that people were entitled to they are now losing.
There is a certain conservative reaction to hold onto the values
and traditions that got them there, but at some point, you realize
you have to change in order to stay the same. And that's the irony
of some of these transformations that are made in conservative countries.
Are you tacitly agreeing with Ed Lincoln in his estimates on
the vested interests?
Well, as presently constituted as people conceive of themselves.
The question is, farmers as farmers are vested interests. So are
mom-and-pop retailers. They all have a stake. The problem is, the
LDP ruled as a one party coalition by giving something to everybody.
Well that's all well and good when there is growth—you can
do that, but now the LDP can't give to Paul without taking away
from Peter.
If you subsidize farmers, you rip off the urban taxpayers. If you
support the banks and their borrowers with zero interest rates,
you decimate the insurance companies and the pension funds and therefore
the older people on which the vote you rely. If you raise the consumption
tax to support the aged, which you have to do in their view because
you've already screwed the pension funds, then you've alienated
the urban taxpayers. So, yes, the vested interests as currently
constituted institutionally may constitute a majority. But it doesn't
work. Those vested interests can no longer be served. As individuals
they would benefit from reform, but as a child of politicians bureaucrats
can't do this. It's the job of political leadership to present a
way so the majority of the population can benefit.
Let me say one more thing. Ed Lincoln and I have been going back
and forth in a friendly debate on this for years now, and we were
actually on a radio show and in '97 in which he said "Gee, Japan
will grow about 2% for the next five years, that's not so bad."
And I said, "yeah it will grow at 2% for the next five years and
that's awful because it's not stable. It doesn't work." At the time
we were on the pessimistic end of the forecasts, but it turns out
that we were wildly on the optimistic side. Now what was then regarded
as people's worst outcome was people's delight if they could grow
2%. And my point all along and my disagreement with Ed Lincoln,
is that he thinks that it's possible to sustain the current situation.
It's not good, it's sub-optimal, but it's sustainable. My point
is that it's not sustainable. The ins...so what you have is these
gyrations up and down on a low and sinking average; it's simply
not sustainable. Therefore, just as nature abhors a vacuum, so does
political nature. This is a great country, and people are not going
to tolerate sinking into the ocean. But you require institutional
vehicles and those do rise up and you can't exactly chart out how
they occur.
Well, wasn't this a criticism of Adam Posen, which has recently
been echoed by Richard Koo et al. that essentially one
cannot have structural reform now because of the short-to-medium-term
consequences of such reform? In other words, better just to focus
on aggregate demand for now.
No. Richard Koo is absolutely wrong! In fact, the opposite is
true: you have to have structural reform.
But would you say that this is in the minds' of several ministries
within the Japanese government?
Well, it depends on what you call the "Japanese government."
The Ministry of Finance (MOF), the Ministry of Economy, Trade
and Industry (METI), the Bank of Japan...
If the economy is doing poorly, they say the economy is too
fragile. We can't have reform. If the economy is doing well, they
say we don't need reform. They can also find a reason not to have
reform. Now, there are serious and sincere people who are afraid
that if we have reform that it will be too destabilizing. And as
a result, they delay reform which makes the cost, therefore, of
reform even higher; think how easy it would have been to solve the
banking problem had you done it in '92 or '95 or '98? What's it
going to look like in 2004? Now in the part of the Koizumi Administration,
I think there is a Thatcherite problem here in that these are conservatives
who think that Thatcherism is the solution for Japan; in that the
bloated state sector is the root of all evil. Now there is a problem
with the political-state sector and it may be that Thatcher is the
solution for the UK—I'm not qualified to comment on whether
or not that was—but it sure is hell ain't the right solution
for Japan because that is not the root of all evil; it is not the
state sector. And so, no, you have to do reform. You have to do
it immediately. Yes, and the initial effects of reform will be depressive.
That's why you need the macro-economic safety net to counter those
effects; massive tax-cuts for example. And even spending public
works, for example, do them to internationally competitive bidding
and through which you bring the prices down and smash the construction
cartels. So there are ways to do it; you have to do the macroeconomics
and the structural reform at the same time. It's not either or;
it's both.
But we have been living in this sort of argument now for more
than four years (perhaps more) as you are familiar with the old
phrase, "From Japan-Bashing, to Japan-Passing, to Japan-Nothing."
As a journalist working in America, whose target readers, one would
imagine, are within the Washington-Beltway for US-Japan economic/military
issues and on the other hand, just the odd Japan aficionado, keeping
their attention focused on Japan would seem very different. Do you
ever get depressed with the way your career has turned out—having
to find new and interesting ways to hook the interest of the general
public?
Not at all. I think it is a really fascinating country. Now,
it is true that Japan has been off the radar screen in much of Washington.
On Capitol Hill, I met with a staff aide who is one of the few people
who is still interested in Japan; he has canceled his subscription
to Nikkei Weekly, it's longer relevant. He mentioned to me
that some guy brought over some silly resolution to the Senate side
that 10 years ago would have gotten 120 signatures even though we
only have 100 senators. And this time got four! America could have
8 percent unemployment, and there will not be a trade war with Japan.
There will be other targets. Japan is really, really off the radar
screen. In '98, the Rubin-Summers team believed that Asia (ex Japan)
would not recover without Japan's recovery. And that motivated a
lot of ways in which policy was decided. And that's proven to be
wrong, at least in the short-term. And that is why you have this
"Japan Nothing."
But I think to underplay the role of Japan is to make the same mistake
of the Japanophobia of 10 years ago which is in the long-run industrialization
in progress in Asia will not take place without a strong, vibrant
Japan. Look at Indonesia: it's in a very dicey transition which
it would not be had Japan been able to sustain its imports, particularly
from non-Japanese companies.
This Bush Administration (which you know has a huge number of Japan
experts) has adopted the view, particularly from the security team,
that Japan cannot be a strong political ally as long as it remains
economically weak; and I think that is right. So, I think, sure,
people know that Japan is no longer a threat. People are less concerned.
In fact, when I was writing my book I showed it to one publisher
and he said, " Hmm, Japan, the System that Soured...why don't
you just call it Japan: Don't Buy this Book. Americans want
to read about countries that are a threat. And I said sure, why
don't we call it Japan: Why China will Rule the World. You
know, Japan and Lady Diana". You know, work with me here!
But I think that's true, but nonetheless, for me, Japan remains
a fascinating country, a fascinating place.
- © Copyright 2002-2004 JapanReview.Net, All rights reserved.
