Japan: Now What Are We Going To Do?
May 11, 2008
I used to follow Japan pretty closely, and as a result nailed the Spring 2003 bottom quite precisely. However, it was clear to me that the government had a trend toward higher taxes, which is problematic for the longer term. Also, the commodities and emerging markets areas absorbed most of my attention. Thus, it ended up on a back burner. So, it’s fun to go back and see what’s been going on there the past couple years, especially as the stock market has been disappointing. The trend towards higher taxes has indeed played out, as we looked at briefly a few weeks ago:
One of the funny things about Japan is that most Western journalism on the country is complete crap. There is a fictional country which they call “Japan”, about which they make up various amusing fairy tales, which is confusing because there is a real country called “Japan” where mostly different things are going on. The New York Times — especially the laughable Nicholas Kristoff, when he was there — is particularly bad in this regard. The business publications tend to be a bit better. The Economist ran a longish piece about Japan recently:
These sorts of articles amount to a distillation of conventional wisdom, and are thus useful for getting the conventional wisdom in a nutshell. If you read it, you’ll notice that there is zero mention of the monetary problems Japan experienced in the 1990s — what was probably the greatest monetary deflation in all of human history. Nor is there much mention of the trend toward higher taxes over the last few years. Even the imposition of new capital gains taxes on equities, or the recent discussion about raising the consumption tax from 5% to 10% or higher, barely gets a mention. Instead, there is endless chewing about “reforms,” most of which go unnamed. Because, if you were to actually name these reforms, they would look pretty weak on paper. The article actually makes a perfunctory list. Let’s see what they say:
Japan needs a mass of economic reforms—a more open climate to foreign investment, for instance, lower tariffs on imported food, fewer subsidies for farmers, freer trade, better tax treatment of foreign companies, the abolition of a welter of business subsidies, a more flexible labour market, greater fiscal rectitude (national debt is currently around 180% of GDP), more accountability by pension funds and insurance companies, further privatisation of services and much more. Takatoshi Ito of Tokyo University, who sits on the Council on Economic and Fiscal Policy, the government’s advisory body that drove structural reform during the Koizumi years, has calculated the economic benefit of pursuing the reforms the CEFP advocates, and the costs of abandoning them. Pursue reform, he argues, and Japan should be able to grow at a respectable 2% a year. Abandon it, and growth will crawl along at 1-1.4%.
Ok, let’s go through these:
1) “More open climate to foreign investment.” Who do you think the reporter — who probably doesn’t speak Japanese — talked to when researching this article? I would guess 80% representatives of foreign investment banks, such as economists and strategists. Maybe a few foreign corporations. Try to find a foreign investment bank, anywhere in the world, that doesn’t think a “more open climate for foreign investment” is a good thing.
2) “Lower tariffs on imported food.” Huh? Japan’s problems are caused by a tariff on New Zealand apples? I personally am in support of a more “domestic-oriented” food policy for Japan and also developed Europe, but I’ll get into that later. Of course, subsidized U.S. agribusiness loves this. First, they get a subsidy from the U.S. government, then they get the U.S. government to go criticize other governments about their subsidies! Most food is already imported without tariff.
Food in Japan isn’t really subsidized. Actually, the national JA (Japan Agriculture) system, which collects the products of many small farmers, is known for being rather inefficient and high cost. Thus, the selling price reflects the full economic cost of production. Certain products have a tariff barrier, which is a sort of subsidy I suppose. Japan already imports about 70% of all its food by calorie, which is about the highest of any large developed economy.
3) “Freer Trade.” That old chestnut. Historically, this has meant special advantages to foreign products. Japanese businesspeople remember quite bitterly the “voluntary quotas” imposed by the U.S. government on Japanese exporters in the 1980s and 1990s. They know that the “free trade” arguments are hypocritical scam. In practice, trade is pretty free in Japan. Chinese stuff is everywhere.
4) “Better tax treatment of foreign companies.” This might be a real issue — although I’ve never heard of a problem here. Once again, isn’t there a strange focus on advantages for foreign companies?
5) “A more flexible labor market.” This has been proposed as a solution for Europe’s high unemployment. Japan has relatively low unemployment. In practice, Japan does not have the kind of legal restrictions on hiring and firing that France has. I don’t see a problem here.
6) “Greater fiscal rectitute.” Everyone is in favor of this, but it was the Keynesian economists from the U.S. who were pushing government spending throughout the 1990s. Of course, they didn’t get too much argument from the Japanese politicians, most of which, like most politicians in the U.S., see their job as Pork For Votes. Go look up the updated Structural Impediments Initiative, which was forced on Japan by the U.S. government in 1995 with threats of Super 301 trade sanctions, and which demanded 630 trillion yen (that’s about $6 trillion dollars) of government spending on public works over a period of thirteen years. The idea was that Japan’s government would be forced (via subtle threats) to direct a large portion of this budget toward large purchases from U.S. businesses, which is known as “free trade.”
7) “More accountability by pension funds and insurance companies.” What does this have to do with anything? Sounds like a scam being run by the Western asset-management companies.
8) “Further privatization of services.” Also very popular among the foreign investors. The postal service was privatized, not because it did a bad job of delivering the mail — that was fine — but to break up the postal savings bank monopoly. Nobody needs to privatize the water utility or the toll roads, although you can be sure we’ll hear arguments for this endlessly.
This is pretty typical coverage of Japan by the best Western media. In other words, it misses the mark completely, and serves various Western business interests. It’s interesting to see that it hasn’t changed much in ten years. Ten years ago, I was working for the Western media in Tokyo, so I am rather familiar, you could say, with all its usual behaviors.
Well, it seems we have run out of space for what is really going on there, at least my preliminary explorations, so that will have to wait until next week.
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Is Consumer Finance a Service? Finance is generally thought to be part of the investment process. Savings and investment are two sides of the same coin. In effect, time and effort is allocated toward creating assets that will provide goods and services in the future. A corporation invests capital to create a productive asset. The benefits of this investment (cashflow and ownership) are delivered to the investors via a variety of contracts, including debt, preferred equity, and common equity. We can see that there is no consumer good or service produced by finance directly — it is a means of creating the productive asset, which is what creates the goods or services. We allocate 100 units of time and energy/goods and services to the creation of an asset that produces 200 units of time and energy/goods and services. This surplus of 100 units of time and energy is allocated to various parties — employees, debt, equity, government. On one side we have savings and financial investment — the purchase of either debt or equity securities — and on the other we have physical investment in productive facilities. The net result is that the economy has greater productive capacity. The financier is merely an intermediary of this flow of capital.
But, what when you loan money to a consumer directly? Often, in this case, it could be considered a type of investment. An investment in education can be considered a capital investment, producing a productive return. An investment in a house creates the benefit of the house itself, replacing the cashflow from rent. Here, however, the definitions begin to get fuzzy. Some sorts of education provide a return, but not a monetary one. Some investments in housing could as well be considered a sort of consumption. It is conventional consumer finance wisdom to consider debt that finances the reduction of an existing cashflow (e.g. elimination of rent) or the creation of greater future cashflow (e.g. education) to be “good” debt. But what of debt that finances spending on unnecessaries, for example a plasma TV upgrade? This has been generally considered “bad” debt, as the asset obtained depreciates and does not provide cashflow or other benefit to pay off the debt.
What of this consumer finance? It is not investment, since it does not create a productive asset, even an intangible one like education. We see that the total productivity of the individual, or the economy as a whole, is not increased. On a cashflow basis, we see that the borrower ultimately pays for the thing purchased, and then diverts more cashflow (interest and fees) to the financer. It seems to me that a service has been provided here. The service is of course credit, which amounts to being able to move forward in time the enjoyment of a good or service from when it would otherwise be obtained, via regular savings for example. This is one of the largest industries in the economy, one that has not been explored much in my opinion. It appears nowhere on the chart of “consumer spending” that was shown last week. It employs an enormous number of people and has huge revenues. One can “invest” in a finance company, as a shareholder or bondholder to a credit card company like Capital One, for example, but this investment does not produce any goods and services beyond the finance service previously mentioned; it results in the diversion of other goods and services to the financiers. Now, I am not going to get on a diatribe about the “blood sucking bankers.” Did anyone who uses credit cards, payday loans, store finance, rent-to-own etc. etc. ever think that they weren’t going to give up some blood in the process? It’s not exactly a big secret. Yet, this seems to me a particularly unproductive form of industry, as all those many people working in the financial industry could be doing something else, providing a different sort of good or serivce. It seems to consume capital — on an economy-wide basis — rather than to multiply it. Of course, the finance businesses seem to be accumulating capital, but what they are really doing is accumulation obligations from others to divert some of their production to the financiers. The financiers of the financiers — investors in debt of a credit card company for example — are not enjoying cashflow from a new productive asset, they are enjoying cashflow from existing productive assets and existing employment labor.