Reaganomics Comes to Japan After Dying in U.S.: William Pesek

Commentary by William Pesek

Aug. 13 (Bloomberg) -- Supply-side economics is making an untimely appearance in Japan.

Much of the focus in Asia's biggest economy has been on raising sales taxes from 5 percent to help the government pay for swelling welfare costs. That may be eclipsed by an increasingly vocal movement favoring lower corporate taxes.

Foreigners have long decried Japan's tax system as ambivalent toward their investments. And the tax structure favors established corporate behemoths at the expense of start-ups. Some tax-policy tweaking could be just the thing to catalyze economic growth, investment and job creation.

There's just one obstacle: Politicians are arguing that Japan's tax cuts will pay for themselves a la Ronald Reagan.

``Even if tax revenue falls in the near term, a tax cut may help revitalize business activity and eventually lead to a rebound in tax receipts,'' Shoichi Nakagawa, a lower house legislator who until August 2007 was policy chief for the ruling Liberal Democratic Party, said last week.

Nakagawa recommends lowering the level to about 30 percent from 40.7 percent, the highest among Organization for Economic Cooperation and Development nations. Expect such ideas to gain momentum as Japan edges toward recession. Prime Minister Yasuo Fukuda on Aug. 11 described the economic situation as ``severe.''

The trouble with tax-policy ideas like those espoused by Nakagawa and others is their basis in Reaganomics.

Voodoo Economics

It wasn't until the presidency of Bill Clinton in the 1990s that the U.S. began to get on top of the huge debt that was amassed after paying for Reagan's tax cuts. U.S. President George W. Bush squandered that progress with massive tax reductions of his own. Bush is expected to leave his successor with a record $482 billion federal budget deficit in fiscal 2009.

That hasn't kept Republican Senator John McCain from promising a further easing of the burden on taxpayers if he wins the November election. McCain and some Japanese politicians are embracing ``voodoo economics'' as the Reagan revolution dies.

It's hard to reach another conclusion with the Federal Reserve bailing out banks through billions of dollars in loans; Congress propping up Fannie Mae and Freddie Mac; authorities helping JPMorgan Chase & Co. to buy Bear Stearns Cos.; and assertive regulation of markets about to make a comeback. As this column has pointed out before, the U.S. is doing much of what it chastised Asia for during the 1997 financial crisis.

Touch of Reaganomics

If implemented carefully, Japan might benefit from deregulating many sectors of the economy and privatizing government-run companies. There's something unsightly, for example, about the government owning a majority stake in the world's third-largest publicly traded cigarette maker.

A touch of Reaganomics and a pinch of Thatcherism could be just the thing for Japan. For a Group of Seven economy, Japan is still too much of a nanny state that believes public officials are better suited to make financial decisions than private managers. It's anathema to the policies that Margaret Thatcher unleashed on the U.K. in the 1980s. A change in direction could help Japan become a global financial center.

The key is not to go too far. Japan is a tale of two economies. If you think a government's job is to create a prosperous, safe, reasonably egalitarian, environmentally stable and well-educated nation, Japan's is an amazing success. If you think a government should open its economy to investment and offer healthy returns, Japan's gets much lower marks.

Spending Cuts

In April, European Union Trade Commissioner Peter Mandelson called Japan the developed world's ``most closed market.'' Executives at Children's Investment Fund Management (UK) LLP might agree. Last month, the London-based hedge fund scrapped a bid to double its stake in Electric Power Development Co., ending a six-month tussle with Japan's government.

Yet lower taxes need to be matched with spending cuts. Bond investors are paying close attention to Japan's pledge to balance the budget by 2011 to reduce the world's largest public debt. Failure to do so will boost bond yields and raise concerns among credit-rating companies.

It also will complicate Japan's long-term challenges, including the double whammy of a rapidly aging population and one of the developed world's lowest birthrates.

There's another reason Japan needs to move carefully: Disenchantment with the policies of former Prime Minister Junichiro Koizumi. From 2001 to 2006, Koizumi began a process of trimming wasteful spending, reducing taxes for the wealthy and selling state-owned assets such as Japan Post.

Opinion polls increasingly show consumers are wary of such changes -- and that they perceive a widening gap between rich and poor. The unemployment rate jumped to 4.1 percent in June from 3.8 percent three months earlier. Wage growth, which didn't rise nearly as much as hoped in recent years, is also slowing.

In June, monthly wages, including overtime and bonuses, decreased 0.6 percent from a year earlier. Summer bonuses at Japan's biggest companies dropped this year for the first time since 2002, according to the Keidanren business lobby survey.

A little Reagan might not be a bad thing. Too much in the way of deficit-busting tax cuts just isn't an option for Japan.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net