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OK, I'm still trying to
get my head around what's going on in Japan these days. This is my first-pass
attempt. I'm not sure why this is so difficult. Sometimes it takes weeks to
chew through things, which might finally be summarized in six or seven
sentences. (But the right six or seven sentences.)
Junichiro Koizumi was always an
unusual character, openly at odds with some of the biggest bureaucracies in
the country. The fact that he became prime minister at all was very odd, as
he is sort of a Ron Paul character. The fact that he was one of the most
popular and long-lasting prime ministers of the last twenty years was even
more unusual. The fact that he actually succeeded, as much as anybody could,
at driving a stake through the heart of the postal savings system/public
works machine, was extraordinary. The fact that he did it all with a silly
movie-star haircut was unprecedented.
However, Koizumi was
never an economics guy. The postal savings system (in essence a mammoth bank
which invested in debt of public "authorities") was never the cause
of Japan's economic difficulties, and reforming it (through privatization
among other things) was never an economic solution. Indeed, Koizumi liked to
have a bit of economic distress, which he could use as a lever for his
"reforms" of bureaucracies. He tended to be a do-nothing on the
economics side, unwilling to cut taxes (although his economics minister Heizo Takenaka had some modest
supply-side leanings), and unwilling to raise them. On balance, this made him
more popular than virtually all the other politicians, who talked about
future tax hikes constantly.
Japan became successful
with a two-party system that combined both the growth aspects and a focus on
social, environmental or welfare concerns. The Liberal Democratic Party was
the growth party. From 1950 to 1974, they cut taxes every single year, and
the economy boomed. This resulted in enormous increases in tax revenues,
which they disbursed to their political cronies via public works spending. In
the 1950s and 1960s, there was enormous real need or benefit from public
works spending. Besides all that had been destroyed in the war, the country
built a fantastic train system. Road construction was always very difficult
and expensive, due to the mountainous terrain.
By the end of the 1960s,
this basic infrastructure was largely in place. Most politicians are just
feeders at the trough of government largesse. They assumed that they got
votes because they delivered cash. That was never really the case; they got
votes because the LDP had been so enormously successful at running the
country, via their extraordinary policy of continuous tax reduction.
Since the LDP pretty much
had the growth and tax-cut angle wrapped up, the opposition parties focused
almost entirely on welfare or environment-related issues. This was also
important, and the threat of political loss was always just enough that the
growth-focused LDP was willing to include these welfare and
environment-related issues into their plans.
This happy combination
changed at the end of the 1980s, when the LDP began a broad tax-hiking campain. Most of it was aimed at asset-related taxes,
specifically a taxes on property, but there was also the introduction of the
consumption tax at 3% in 1989. This was fantastically, enormously unpopular.
The consumption tax has long been the "third rail" of Japanese politics.
Politicians who grasp it are quickly broomed from
public office. For reasons I never really understood, the Ministry of Finance
has been pressing for a double-digit consumption tax since 1974. Japan used
to have a consumption tax, in the 1940s. The economy was moribund. When the
tax was eliminated in 1950, and other taxes lowered, the great post-war
economic boom launched. You would think this would be rather good evidence
that Japan didn't need a consumption tax? Well, the MOF guys didn't get where
they are today by being smart.
MOF is able to twist the
arms of politicians in many ways, mostly via their role in distributing the
public works largess to various regions and localities. Prime Minister
Masayoshi Ohira was the first to suggest a
consumption tax in 1979. He went down in flames.
Prime minister Yasuhiro
Nakasone tried to suggest a consumption tax in 1987. This led to a
demonstration in Tokyo of 160,000 citizens in opposition to the plan. He
backed down. You would think politicians would get the messsage,
but they really are rather stupid. The next was Noboru Takeshita,
in 1989. Takeshita was the prince, the ringleader,
the example-setter, of that portion of the LDP which really saw its political
base resting upon their ability to deliver government contracts. He owned a
rural construction company. Thus, perhaps he was also most susceptible to
MOF's not-so-gentle hints that if he pushed through a consumption tax, his
voting district just might coincidentally be showered with a bucket of money.
In 1988, the government ran a surplus on the order of 2.1% of GDP. Takeshita's threats to impose a consumption tax resulted
in his popularity rating dropping to a low of 7%, which, I believe, still
stands as a record in Japanese politics. In mid-April, 1989, Takeshita managed to push thorugh
his tax hike plan. On April 25, 1989, he resigned from office, as his
overwhelming unpopularity manifested in a scandal involving IPO kickbacks.
His successor was Sosuke Uno. Uno promised to continue with Takeshita's consumption tax hike plan. He lasted in
office a total of 67 days.
The opposition parties in
Japan had no real background in pro-growth policies. They had always focused
on welfare-type policies. But, by then it had become apparent even to these
slow learners that the LDP's consumption tax plans were unpopular. They had
already tried to block Takeshita in April 1989
(thus delaying the budget from its normal passage before the start of the
fiscal year on April 1). In July 1989, they won a majority victory in the
Upper House for the first time in postwar history! In December 1989, they
presented a bill to the Upper House of parliament that promised to repeal the
brand-new consumption tax.
Lower House elections
were to be held in February 1990. The possibility of the LDP losing power in
both houses for the first time since World War II loomed. You would think
that the opposition party would continue with its popular "repeal the
consumption tax" platform. But, they abandonded
it, and adopted a new promise: food and beverages would be taxed at a lower
rate. The LDP won, and the opposition parties sank back into obscurity with
their boring portfolio of social welfare programs.
The LDP's switch from
being a successful business and growth-oriented party to being a party of tax
hikes and low-grade public spending pandering frustrated some key LDP
members, most notably Ichiro Ozawa, who was LDP Secretary General in 1989. In
1993, as the economy crumbled, the stock and property markets collapsed, and
the LDP piled one tax hike on another (particularly property-related taxes),
Ozawa split with the LDP to form the tiny Japan Renewal Party. Ozawa was
always a wheeler-dealer, and he was able to put together an opposition
coalition centered on Morihiro Hosokawa. Hosokawa
promised tax cuts, as an alternative to the LDP's endless tax hiking.
The opposition coalition
won the majority of the Lower House for the first time in postwar history,
and Hosokawa became the first non-LDP prime minister. Here was the
opportunity for real change! He was initially very popular, with a support
rate of 72%, which set an all-time high.
Hosokawa's collapse in
popularity can be traced almost to the hour. I know the hour: 1 a.m., when
Hosokawa called a suprise press conference.
Unfortunately, I don't know the day, but it was in February 1994. At the
press conference, Hosokawa shocked his political supporters by calling for a
rise in the consumption tax to 7%. What??? Hosokawa's quick change of policy
stance is attributed to MOF pressure. Hosokawa resigned on April 8, 1994.
For years afterward, the
opposition parties were never able to cobble together a decent alternative to
the LDP offerings. Ozawa had many worthwhile "reform" plans (I
actually read his book!), but, for reasons I never understood, always stuck
by his vision of a 10% consumption tax. When the LDP offered its plan to
raise the consumption tax to 5% in 1996, the Ozawa-led opposition countered
with a plan to raise it to 10%. The LDP won, and the consumption tax rose in
1997. This tax hike is widely blamed for contributing to the "second leg
down" for the Japanese economy that began soon after, and lasted until
2003. (It did contribute, but increasing monetary deflation was also a major
factor at that time.)
Much of this history is
also covered (rather lightly) in my book. I'm repeating it here to give the
background to the recent developments, which are very much a continuation of
this story.
Well, that's it for this
week. This sure is taking a long time to get done.
Nathan
Lewis
Nathan Lewis was formerly the chief international
economist of a leading economic forecasting firm. He now works in asset
management. Lewis has written for the Financial Times, the Wall Street
Journal Asia, the Japan Times, Pravda, and other publications. He has
appeared on financial television in the United
States, Japan,
and the Middle East. About the Book: Gold:
The Once and Future Money (Wiley, 2007, ISBN: 978-0-470-04766-8, $27.95) is
available at bookstores nationwide, from all major online booksellers, and
direct from the publisher at www.wileyfinance.com or 800-225-5945. In Canada,
call 800-567-4797.
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