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This article was written on 22 Sep 2012, and is filled under Japan.

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Reviving the Japanese Economy

This is a sort-of part 2 to my earlier post on why Japanese Bond Prices continue to defy economic gravity.

People ask what might Japan do to improve its economic standing. After all, Keynesianism didn’t work, regulatory reform thus far has not worked (more on that later) and Quantitative Easing almost certainly hasn’t worked.

Enter then, Takeo Hoshi (University of California, San Diego) and Anil Kashyap (University of Chicago) with their NIRA Report (the Japanese equivalent of NBER) entitled ‘Policy Options on Japan’s Revival’. In this 40 page report the scholars argue that reviving the Japanese economy relies on three key areas:

  1. Regulatory Reform
  2. Opening up the Japanese economy
  3. Macroeconomic Policy reforms

I will run through each of these in turn before casting some of my own comments.

Section I: Regulatory reform

The opening gambit is the ever-popular ranking comparison. As we all know Japan’s ranking in the World Bank Ease of Business assessment is around 20. The authors credibly focus their attention on the OECD member state rankings, where Japan is in the middle (14 out of 31, below Germany, but above Estonia). Delving further into the figures Hoshi and Kashyap show the three areas where Japan can improve are:

  • Business Formation (23 days to start a business; OECD average is 12)
  • Taxes (Compliance costs 330 hours on average a year, OECD average is 186)
  • Land use (193 days to build a warehouse, OECD average 152)

However, in simplest terms, it is just too laborious to set up a company in Japan. To set up a company in Japan you need to contact:

  • The Ward Office (or district office)
  • The Legal Affairs Bureau of the Ministry of Justice
  • The District Tax Office
  • The Local Tax Office
  • The Labour Standards Inspection Office
  • The Social Insurance Office
  • The Public Employment Security Office

This compares to Malaysia, Vietnam and, crucially South Korea where they have a one-stop office for all business registration. If the hyperactive unions in South Korea live with this surely the Japanese can as well.

In addition, taxation for the self-employed and SME market has resulted in gross under-reporting of wages and tax which, as has been noted before will come back to haunt the government at some point

Land transfers due to antiquated registries result in longer transfer times than would be expected in the OECD. Hoshi and Kashyap state that:

The farm land registry is antiquated and error ridden. It should be updated and modernized so that transfers can be done quickly without leaving doubts about whether a clear title has been conferred to the new owner.

You might think the authors so far sound quite sound, but they go further. Using South Korea again they state that the Japanese address system wastes lots of time and that they should move to a western street system. They add in South Korea:

 According to a report in Geospatial World, the Korean government estimated that the reform will save about 4.3 trillion won (about 3.8 billion dollar at the exchange rate of 1,118 won per dollar) a year.

Zombie Banks

Under Koizumi a number of the ‘special loans’ for SMEs to ‘restructure’ their business were terminated to allow new blood in and wash out the old. Thanks to the DPJ, according to the authors, by allowing protection to be enshrined into law the government is not allowing free entry and exit for troubled companies. As a result, poor performing firms continue to exist.

Comment: This is the single fact that has separated Japan from its neighbours. When the Asian Financial Crisis occurred, the Koreans were forced to let companies go under. Havoc ensued for the next two years, but after that the economy was growing again.

Manufacturing and the Monozukuri Bias (物作り)

Total factor productivity in the manufacturing and non-manufacturing industries is also examined (see graphs below). Despite the policy bias towards manufacturing, Japanese productivity has hardly improved in recent years. The same is true for non-manufacturing. Despite numerous suggestions by government panels very little has been done. The authors cite the problems surrounding medical and primary child care among the many that need dramatic action.

Japanese Total Factor Productivity vs the OECD in Manufacturing

Diagram 1: Kinda productive

Japanese Total Factor Productivity vs the OECD in non Manufacturing

Diagram 2: Oh my

Section II: Opening up the Japanese economy

Free Trade

The divisive issue of FTAs is brought to the fore by the scholars. They believe additional ‘globalised’ R&D as well as trade exchange would more than outweigh the job losses in the weaker, smaller industries that focus on the domestic market. Productivity gains would come from this globalised insight.

The Kicker: Agricultural Subsidies

Japanese Agricultural Policy has few fans and Hishi and Kashyap are not among them. The authors state that Japanese support estimates (PSEs):

The PSE seeks to measure the annual monetary value of gross transfers from consumers and taxpayers to support agricultural producers. Japan’s PSE is much higher than the U.S. and higher than the EU. The level of support for Japan declined in the first half of the last decade, but has begun rising again. The decline of PSE and the subsequent rise reflect the Koizumi reform and the post-Koizumi reversal that our previous report pointed out. For 2010, the PSE is estimated to be $53 billion (or ¥4.664 trillion assuming an exchange rate of 88 yen/dollar). This happens to be almost exactly equal to the value added of the agricultural sector in 2010 (¥4.665 trillion). Thus, the total value added of the agricultural sector is completely offset by the subsidies, implying the net contribution of the Japanese agriculture in value added terms is zero.

The diagram they referred to is shown below:

OECD with Japan Total Factor Productivity of Agriculture

Not very productive

In short we have two problems: 1) Agriculture is grossly over subsidised and 2) Agricultural registries inefficiently capture land use patterns and therefore leads to the land being misappropriated when it should be used for agricultural reasons. The problem has worsened because subsidies are calculated based on hours worked, leading to disproportionate pay outs to small inefficient farms.


Like many economists have suggested: the authors encourage the Japanese government to pursue a more inclusive integration policy of immigrants as it can benefit the population.


Section III: Macroeconomic Reforms

This reverts to the earlier Hoshi and Ito paper I covered here.

My thoughts:

On Staffing: Japan has a chronic shortage of Chartered Accountants, Qualified Directors, Corporate Lawyers and Officials for registration purposes. Where they do have them, they are inadequately trained (e.g. Accountants and Public officials) so that when a change comes through they are ill equipped to deal with reform implementation.

Corporate Governance

I will focus on Accounting because of my Yamaichi Securities experience

By the time Japan comes even remotely close to implementing the IFRS roadmap even more muck will clog the system. This is before we get into the duties and responsibilities of a director of a company. Back on topic, even if reforms like the IFRS were implemented it is questionable that there would be enough qualified Japanese accountants of suitable calibre to carry out the operation.

There are certain aspects of the report (aside from the grammatical) that do occasionally smack of Anglo-Saxon institutionalism (streets? Is it that bad?). Let us take their valid comments surrounding Child Care in Japan. Please name one country that has an effective day-care system. Outside of the Nordic/Scandinavian countries government subsidised childcare has become shambolic. Even within the Nordic states, the over-generous maternity/paternity grants has seriously handicapped investment.

On centralised institutions

It has become abundantly clear along with others that there other genuine problems with data collection and data provision enforcement. Four key areas come to area

Pension registration (dealt by name and not Social Security ID therefore being costly to maintain)

Land registration (inaccurate storage of information)

Employees of SMEs (evading tax, handicapping the Social Security system, creating a bigger deficit problem)

Lack of digitisation in general. I’m not saying the Japanese obsession with cash is a problem, but a cursory look at how financial services operate in Japan suggests a number of settlement and clearing operations in mid/back office functions could be saved by digitisation. In contrast with a number of facilities

On Macroeconomic Stability

The advocating of government spending during the Lost Decade whilst commendable, was devoid of any alternative suggestions. What should the government of invested in, if these public works were so inefficient? Further still, given that QE has not worked in the 1990s or in the 2000s why do they persist in advocating it? Granted, the ability to print money and use it to purchase REITs and ETFs is a interesting idea but when do you stop? History suggests that nothing short of a clearing of the private and the public balance sheets is required. It can either be mandated by the government or the invisible hand of the market can do it for you. Either way it will happen.

One Comment

  1. […] corporations and banks — inefficient, uncompetitive entities kept alive by government subsidies. Although some zombie banks left on life-support from the 1990s were terminated during the Koizumi ye…, it is fairly clear from total factor productivity figures of both Japanese manufacturing […]

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