From Prof Masazumi Wakatabe.
Sir, Your editorial “Abe’s dilemma: Only structural reforms will take Japan out of deflation” (November 12) is misleading in three respects.
First, the subtitle confuses deflation with long-term economic growth. This confusion is puzzling since you have correctly pointed out that reforms are needed to raise Japan’s long-term growth prospects. Also, the claim is not founded in history. The world economy has experienced deflation on several occasions, but the so-called structural reform has not been the only remedy for ending deflation, or even a remedy. The experience during the Great Depression is the prime example: the Roosevelt administration did implement the New Deal policies, but they were not market-oriented reforms. And it is very difficult to come up with any reform that the UK government implemented during the period. What ended deflation in the past was a macroeconomic policy regime shift, which prime minister Shinzo Abe and Bank of Japan governor Haruhiko Kuroda are aiming to achieve. As for the result, it is true the headline consumer price index has been lifted by energy prices, but the CPI excluding food and energy prices has reached 0 per cent. The way out of deflation is under way.
Second, your call for labour market reform is misleading in that it does not specify what kind of labour market reform is needed. There is no conclusive evidence on the relationship between economic growth and labour market reform in the form of deregulation in employee protection. Third, regarding Japan’s debt level, your figure of 250 per cent of national income exaggerates the true fiscal situation. This figure is in gross terms, but the Japanese government owns assets of Y6.29tn, so in net terms Japan’s debt level comes down to 95 per cent of national income (if one subtracts non-financial assets from government assets, the figure becomes 130 per cent).
Still, Japan needs reforms badly, it should put its fiscal house in order, the government and the Bank of Japan should do more on macroeconomic policy, and reforms may affect the expectations of the Japanese people and the foreign investors. But reforms are needed mainly to raise the potential output of the Japanese economy, not to end deflation.
Masazumi Wakatabe, Professor of Economics, Waseda University, Tokyo, Japan
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