JapanReview.net Economist Poll
The Magnificent Eleven (July 2003)
By: Paul J. Scalise and Yuki Allyson Honjo 

Introduction

Falling stock and real estate markets. Rising unemployment and non-performing loans. Government debt, stagnant GDP, the endless finger pointing.

Welcome to the dismal science, a profession once jokingly defined as the painful elaboration of the obvious. While that might be true, of course, we decided to test the hypothesis behind the humor and ask if there was a consensus among Japan economists. The Million-Dollar Question: What’s wrong with Japan? Is it still unclear, or was Ronald Coase right—“If you torture the data long enough, Nature will confess”?

The JapanReview.net Economist Poll (2003) set out to answer this question in punctilious fashion. So as not to keep you all in suspense, we’ll jump right to the punchline. There was no consensus…most of the time. That said, perhaps the lack of consensus explains Japan’s predicament more than you think (but more on this point later).

First, the nuts and bolts of our survey.

We polled a sample of what we consider to be the top-tier brokerage houses in Japan. As some declined to be identified, we list the population itself. Keep in mind that eleven were randomly selected. (Note: click here for an outdated list of all domestic Brokerage Houses and related Research Institutes). What makes a top-tier firm? Aside from volume of business, assets and international presence, we add the intangible: “quality” of research. This explains some of the smaller Western firms that appear within the population below.
 

Of our sample of eleven firms, over 60% of those polled had doctorates, making them an over-educated bunch. Lest there should be room for doubt, all polled are fluent in Japanese, and have over ten years experience in the equity market. Also, our sample included Japanese nationals and domestic firms. The rest are a mixed bag from around the world.

Section I: Japan's "Lost Decade", Who's Fault Is It?

“In order of importance, ‘0’ being ‘not important at all’ and ‘10’ being ‘most important’, please number who/what bears that greater responsibility for Japan's economic malaise.”

It seems like a clear-cut question, but you would be surprised at the range of answers. Ask a journalist and you might come across the “structuralist” explanation. Ask an academic and she might argue in favor of the “monetarist” viewpoint—and vice versa. In addition, people are coming up with alternative challenges to these schools of thought. Take, for example, Nomura Research Institute’s Chief Economist Richard Koo with his latest book on “Balance Sheet Recession” or former investment banker R. Taggart Murphy’s excursion into “policy traps” via the current account surplus.

We started by choosing the usual suspects as a point of departure (e.g., Bank of Japan, LDP, and the Ministry of Finance, to name a few). We then moved onto bolder bête noirs such as China and the United States. Finally, we appealed to the abstract: concepts rather than names and faces. Here are the results.



 

All in all, we were looking for patterns. As the summary table above suggests, the top three culprits according to our polled economists were on average: (1) the MOF & FSA, (2) the LDP and (3) the Prime Minister & Cabinet. Not important at all? (1) USA & Gaiatsu, or “foreign pressure”, (2) China & cheap imports, and (3) Labor Unions. Surprisingly, the BOJ came in as the fourth most important monkey wrench thrown into the Japanese economic machine, and responses varied from a rather guilty nine (9) to an innocent one (1). Another question spanning the gamut was corporate de-leveraging (i.e., the “balance sheet recession” argument). Here responses ranged from a fierce ten (10) to a non-existent zero (0).

While there seemed to be a general agreement in the top-three culprits, not surprisingly, the reasoning behind the finger pointing ranges widely. For example, HSBC chief economist Peter Morgan notes that “[the MOF & FSA] actively delayed adjustment to and recognition of bad debts”, whereas DrKW fiscal analyst Kunji Okue charged them with “not showing a strong willingness to solve the country’s deteriorating fiscal problem.” NRI chief economist, Richard Koo, argues “they never realized that Japan contracted a different disease” from what is commonly taught in macroeconomic textbooks, whereas another interesting opinion charged the MoF & FSA with “attempt[ing] to save face (and to keep amakudari positions) [that] prevented the writing of rules that would have exposed the truth.”

In short, the reason the MoF & FSA are everybody’s favorite punching bag is not because of one specific policy blunder per se, but rather the tacit assumptions and ideals that economists carry with them about the role these two organizations play. Issues relating to the national budget, taxation, corporate governance, and stock markets essentially fall under the purview of these two organizations. Depending on your ideological bent, one could fault the MoF for almost anything.

(Click here for a selection of responses from five of the eleven economists.)


Section II: TRUE OR FALSE

Okay, so maybe trying to pin the blame on any one entity is more academic than useful. Our next series of questions dealt with the controversial range of issues that policy makers confront almost daily.

Despite Nobel Laureate Milton Friedman’s contention that economists basically agree on two fundamental points—free trade being a win-win situation and inflation being always and everywhere a monetary phenomenon (the latter proposition Dr. Friedman no longer believes, by the way), economists remain, as ever, a fractious lot. (Click here for a selection of answers.)

Only two questions came close to a unanimous vote, and even here, 19% of those polled voted against the grain. The first question that found a degree of consensus was No. 3: “Rising government debt levels hold NO negative consequences for the future.” Here, polled economists were almost entirely in agreement (82%) that debt, sooner or later, will be a problem. Explanations as to why varied. Some pointed to the high savings rate among the elderly as proof positive of Ricardian Equivalence; that debt financing by bond issue merely postpones taxation and therefore, in many instances, the higher savings rates in Japan reflect future fears of such tax hikes (Note: a high savings rate implies lower consumption and, by extension, lower economic activity.) Others pointed to the public debt-dynamic as moving towards a kind of “trap” whereby any future action (monetary or fiscal) will almost assuredly curtail aggregate demand, thus keeping the economy in almost permanent recession moving forward.

The second question that found a degree of consensus was No. 7: “PM Koizumi has implemented real/meaningful structural reforms to date.” Again, 82% of those polled found this proposition to be FALSE, and that the Prime Minister has dropped the ball on any number of occasions. Many noted that most of the reforms made by PM Koizumi were started before him, while others insisted that the current high support rating of his Cabinet simply implied no meaningful reform existed at all. Thanks to the short-term pain that would have been involved, had the Prime Minister really tried to implement structural reform, they surmised, he would have been driven from office.

As for the other questions, polled economists were split almost 50-50.

The proposition that “inflation is always and everywhere a monetary phenomenon” was met with only 55% of those in agreement. Those in disagreement usually had colorful answers. One economist, for example, recounted how Dr. Milton Friedman also invented the vertical Phillips Curve, which started modern supply-side economics. Seeing how important the supply-side of the economy is in theoretical discussions nowadays, he surmised, “Dr. Friedman cannot have it both ways." Another insisted that the proposition was only true for “inflation” but not necessarily for “deflation”, while another still argued that inflation/deflation should be perceived as a phenomenon caused by multiple factors…monetary conditions in the real world only being one of them.

Regarding trade, the responses were not as predictable as one might think. Despite the notion that all economists favor free-trade and disregard the importance of trade surpluses, only 73% of those polled disagreed that “Japan’s growing current account trade surplus is a sign of its superior international competitiveness with the West.” While most pointed to structural factors stemming from the balance of payments, one economist still found the proposition to be entirely TRUE—Japan is the most competitive nation on the planet. Two others were largely undecided as Japan certainly dominated some industries (e.g., autos), and therefore the answer could be considered partly TRUE, partly FALSE.

Oh, dear…

Section III: A Thirty-Second Survey

In order to round out our survey, we included a section on tastes, preferences and policy. (Click here for a selection of answers.)

What to do?
The first question granted our economists omnipotent control over state policy: “If you had three wishes, what would you change about the Japanese economy?” No major patterns of policy consistency to be found in any of the responses. “Reform” was a buzzword bandied about the floor, but everyone had different ideas on what exactly that meant. The most recurring answer was to “fix the banks,” although few economists said how—one of the perks of being an all powerful policy god. To be fair, Lehman Brothers Chief Economist, Paul Sheard, did give a two-point plan:

“(1) Remove, in a credible fashion, the government guarantee on large-lot bank deposits, and repeal the legislation (passed in December of last year) introducing a permanent and unlimited guarantee on zero-interest rate deposits even after the guarantee on large-lot demand deposits is scheduled to expire in March 2005; and (2) inject sufficient Deposit Insurance Corporation funds into the banking system to allow banks to mark their balance sheets to market without triggering a collapse of the banking system”, but nothing read like stereo instructions.

Other policy suggestions included “incentive-oriented tax schemes” (Goldman Sachs), “forcing people to use land more efficiently” (Nomura) and finally the most innovative of all: mandating “the death penalty for corruption” (ING).

What to read?
As we are a website on books on Japan in English, we asked them a fairly straightforward question: “What are the best and worst books on Japan?”

Economists are a polite mafia. While vociferous in critiquing policy, they pussy-foot around the best and worst books on Japanese political economy. The question for “worst” books on Japan had the least number of respondents. We only had three concrete titles, and the rest ranged from “too many to mention” to a simple blank. We suspect that it’s because there is a book in everyone’s future. No need to antagonize future reviewers. However, it wouldn’t hurt to mention that one economist views the Economic White Paper (Keizai Hakusho) as his top-pick.

Still, “best” books did receive some overlapping responses. The most popular answer was John Dower’s Embracing Defeat and Karl van Wolferen’s The Enigma of Japanese Power. Richard Koo mentioned his own book, Balance Sheet Recession. Two works of fiction made the list: Chomin Nakae’s Discourse by Three Drunkards on Government and Peter Tasker’s latest novel Dragon Dance (with the caveat that it’s “interesting, but not realistic”).

Postscript
No survey is complete without the frivolous control question: “Who studied less at the London School of Economics, Mick Jagger or PM Koizumi?” A fair question, we feel: both have big hair, worldwide media attention, and are at the top of their professions—implying some understanding of economics.

Again, no consensus: 55% (Koizumi) and 45% (Jagger), but Koll said it best: “Same difference—both are awesome at managing their own brand, but still can’t get no satisfaction.”

Well said.

Section IV: Soapbox

What to think?
This is our soapbox section. It gave our polled economists the opportunity to stand up and rant about whatever they deigned appropriate. Not surprisingly, the majority of our economists began to wax lyrical about the nature of Japan’s “problem” whether that “problem” meant the media, the government or the nature of analysis itself.

Probably the most thought provoking answer again came from Jesper Koll: “By 2003, Japan is stuck in a Buddhist truth-loop—All action leads to suffering. The good news is that one should never underestimate the ability and willingness of the Japanese people to suffer together. That's why Japan's model cannot be applied to other countries/economies. The bad news is that one should never underestimate the ability and willingness of the Japanese elite to impose more suffering. That's why Japan remains highly relevant.”

Conclusion

Over the years, much has been made of the idea that Japan is a “consensus-driven democracy.” Some might rightly question the stereotype, but at a time when inaction is more prevalent than action, one can’t help but wonder: Is the lack of professional consensus among economists the reason why Japan continues to stagnate? Are Japanese officials waiting for a convincing rationale to arise before taking decisive action? Or is the lack of consensus, to quote Dutch journalist Karl van Wolferen, just a misnomer for a “state of affairs in which no concerned party thinks it worthwhile to upset the current apple-cart?”

To be sure, the JapanReview.Net Economist Poll is, in its own way, an illustration of the problem: in a consensus-driven government, if professional economists devoted to the in-depth study of the economy’s macro and micro frameworks cannot agree amongst themselves, why should others expect decisive action? This leaves the current Japanese Cabinet in somewhat of a dilemma. Wait until a consensus forms, with the underlying risk that “time is money” or commit to a single-plan which may lead to political suicide or glory, depending on your spin.

Clearly, “momentum of inertia” is the preferred choice among the most cautious, but for how long?

Prolonged economic recession has pushed the Japanese government into a proverbial corner. Comprehensive measures are inevitably required to deal with the fiscal and economic problems facing Japan. Issues related to pension funds, regional finances, taxation systems, government operated special corporations, corporate governance, profitability, sector deregulation and the third sector all have a direct bearing on the current situation—in fact, this in itself is part of the problem. As all the issues are interlinked, it is impossible to treat them separately. Japan’s current economic model was built in the 1950s, and has worked like a precision machine for decades; however, as the economic and social assumptions on which the design was based have crumbled, many of the machine’s parts have ceased to function as well.

One would hope that the dismal science is capable of eventually forming a new paradigm for economic growth and prosperity in Japan. But the question is always the same: What policy and at what time?

May the answer come soon.