Heizo Takenaka

President, the Tokyo Foundation and

Professor, Faculty of Policy Management,

Keio University

　

In order to revive the Japanese economy,　it is necessary to proceed with two forms of restructuring. These are "reactive restructuring" and "proactive restructuring." This fact was also expressed in the reference by Prime Minister Mori in his Diet speech to "defensive restructuring" and "offensive restructuring." The former is the elimination of the three excesses (plant and equipment, debt, and employment), which are the negative inheritances of the crash of the speculative "bubble" economy. The latter is structural reform in order to respond to the new environment formed by the information technology (IT) revolution and globalization.

　Looking back at the economic policy of the Japanese government for 2000, although there was some progress visible on both fronts, the situation can definitely not be called adequate for dealing with changes in the global economic environment. 2000 was a year that left no few problems concerning the speed of reform.

Let us start with reactive restructuring first. Elimination of excess plant and equipment, amortization of bad financial assets, rationalization of personnel assets, and other corporate restructuring accelerated from 1999 and gave rise to the rise in stock prices up to the start of 2000. In the banking sector, one large merger after another was announced and from 1999 to 2000 an environment was finally created proceeding to serious amortization of bad financial assets.

　As government measures for promoting such restructuring, strict encouragement for quick corrective measures and a legal framework facilitating mergers as well as tax arrangements to promote amortization were studied. However, even though part of these government measures were implemented, it is hard to claim that they were adequate. The stance of the Finance Revitalization Committee concerning quick corrective measures was moved back and forth by the personnel at the top and at times a quite backward posture. Serious revision of the Commerce Act requires time and the establishment of the necessary tax system also went no farther than exceedingly partial measures. It is thought that a major reason why corporate restructuring proceeded from 1999 to 2000 was ultimately the powerful forward moves in opening up corporate information as required by international accounting standards.

　It is well known that there has been demand that corporate accounting, particularly for large corporations, conform with international standards and by making consolidated accounting (including subsidiaries) mandatory, it made it difficult to hide problems in subsidiaries and current values were employed for asset evaluation, which was a powerful incentive promoting reactive corporate restructuring.

　However, as will be discussed below, from the second half of 2000 onward, the market took a severe attitude toward the lack of thoroughness of these measures. Although the external pressure of international accounting standards was used to promote restructuring, the application of healthy competitive pressure on financial organs through quick corrective measures and the application of competitive pressure to the corporate sector as a whole through relaxation of regulations and other measures can not be said to have been adequate.

　Looking back over economic policy in 2000, what can not be overlooked is the importance of the "IT Strategy Conference." In order to make use of the historic opportunity provided by the IT revolution, the fact that such an organization was established within the Prime Minister's Office is quite valuable. This is a good example of proactive restructuring.

　At the IT Strategy Conference, there were two crucial study items. First was the strategic construction of high-speed Internet infrastructure and the second was raising the general level of information literacy.

　For infrastructure, it was declared that within five years, Japan must build the highest level infrastructure in the world and that in order to accomplish this, competitive policies will be promoted to put to use lessons from various nations. These points can be seen as a major accomplishment. However, all the concrete policy issues, such as on what kind of base will NTT be split up and privatized to create a competitive system and how a system of responsibility will be created for attaining these targets, were left for the future. After the end of the Strategy Conference, the IT Strategy Headquarters (with ten members each from the government and the private sector) was established based on the Basic IT Act. It must be said that this is extremely important.

　Furthermore, the IT Strategy Conference did not provide sufficient fruit concerning policies for increasing information literacy and this was left as an issue for the future. The IT Strategy Headquarters has a large responsibility for the future of these issues.

With these two types of restructuring underway, what should macro-economic policy have been for 2000? How well did actual policy do? Concerning these points, there is a quite interesting fact. Reflecting the efforts for corporate restructuring discussed above, the settlements (consolidated basis) for the first half of Fiscal Year 2000 for the companies listed on the stock exchange(except for the financial sector) showed profits 2.8 times those for the previous year, but stock prices remained low during the second half of last year. The fact that stock prices were low even though the actual economy was doing fairly well reflects the evaluation by the market that the "financial risks" for the future of the Japanese economy is quite extremely large.

　One of these financial risks is the problem of non-performing assets in the banking sector already discussed. Another financial risk drawing attention is the increased government deficit. I have already argued any number of times in magazines that current government deficits can not be continued but there is an increasing possibility that this problem will manifest itself at a relatively early time through clogging up of regional government finances.

　What we have seen from the macro-policy perspective is that despite the fact that both reactive restructuring and proactive restructuring are being carried out in an inadequate manner and high levels of economic growth can not be expected, for the past one-two years the government has set high targets for growth. This is related to the political fact that there were elections. Because the government set such high growth targets, this invited a situation in which each time it becomes clear that the targets cannot be met, supplementary budget expenditure that increases the amount of government red ink becomes unavoidable. This increased government deficit is increasing the financial risk and strengthening the feeling of economic stagnation. This is the vicious cycle into which we have fallen.

　Based on these reflections, the government's economic management for 2001 must further accelerate both reactive restructuring and proactive restructuring and also make clear a posture that decisively breaks with the macro-economic vicious cycle of setting overly optimistic growth targets that eventually result in increased government deficits.