ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronEye IconIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintSite TitleTitle ChevronIcon Twitter

Searching for the elusive third arrow

NEW YORK -- Most economists say Japan needs to put its fiscal house in order. The question is how and within what time frame. Prime Minister Shinzo Abe called his decision to put off a second sales tax increase, initially slated for October 2015, a "grave" one. But given that the hike to 10% from 8% will be delayed by only 18 months, is the situation really that serious?

Anil Kashyap says Japan will have a debt crisis on its hands if it fails to get its economy growing again.

     Anil Kashyap, a professor of economics and finance at the University of Chicago, dismissed concerns that Abe's move in itself will damage Japan's fiscal health.

     A more pressing worry, Kashyap said, is whether Japan can reform for long-term growth. He warned a failure to do so will push the country toward a debt crisis.

Q: What's your take on Abe's decision to delay the sales tax increase?

A: I never thought the way they structured the tax increases was best. I would have rather had it come in more gradually, like 1% a year for five years. The reason they need to raise the tax is a medium-term problem. It's clear that Japan over the next 10 years needs to collect more tax revenue. The tax is going to have to go a lot higher than 10%.

     But there's nothing that says they have to go to 10% next year or it's going to be a huge problem. This has gotten so contentious because they chose to set up the policy in a way that it was going to have these two abrupt jumps.

     I don't mind delaying [the hike] as long as it's implemented eventually. I do think the economy right now is weak, and that delaying is not a problem. If the reason for delaying it is to get the third "arrow" program [structural reform] sorted out and come up with some true reforms that improve growth prospects, then it's worth delaying it.

Q: How is Abe doing on the reform front?

A: I've been concerned that the third arrow has never been shot and never will be shot. And that's the single biggest challenge facing Japan. I suggest that Abe choose among his 10 policies that are part of the third arrow, get rid of the less good ones, and focus on the important ones.

     [He could get rid of] things like the agricultural policies, which are potentially a huge fight but maybe less important than getting women working, raising immigration and, most importantly, making doing business easier, business formation stronger and investment stronger. Whether Japan has a crisis at some point is all about whether [it] grows. I don't think they can just tax their way to the point where they can avoid problems. They need to restore growth, and they need to collect more revenue. They need both. And so far, I don't think Abe has done much to improve the medium-term growth outlook for Japan.

    [Abe needs to] put emphasis on things that could really change the outlook. If Japan doesn't grow, it won't be able to afford the amount of taxes it needs.

Q: You have praised Bank of Japan Gov. Haruhiko Kuroda's monetary expansion. But he acted thinking Abe would go ahead with the tax hike. Was Kuroda's action positive after all?

A: Yes. It will help the economy because it'll encourage people to start buying again. That said, monetary policy is not the biggest problem facing Japan. Deflation is a symptom of the government not being able to attend to many problems. Monetary policy is not going to make a big difference over the next 10 years.

   They should take monetary policy action because it's the easiest thing to do. It doesn't require a big political compromise. It doesn't require changing cultural norms. It doesn't require the Diet and the Prime Minister getting together. It's something that the central bank can do on its own, if it's sufficiently determined. But monetary policy is not a cure-all.

     Kuroda's not going to change the fundamental growth outlook for the next 20 years. The government has to do that. There are lots of regulatory barriers, and just straight up regulation on employment rules and so on. [These are issues] that really do matter for growth. Promoting trade agreements will also help.

Q: Some say the BOJ is monetizing debt and could weaken confidence in government bonds. How high is the risk of a debt crisis in Japan?

A: If Japan doesn't grow, it will have a debt crisis. And every year that goes by where Japan doesn't take the steps to start growing, it is increasing the risk of a crisis. But it's not because of the monetary stuff. Maybe Japan's debt crisis will play out through massive inflation. There's nothing that Kuroda's done today that's made that inevitable. That will come because they haven't figured out a way to grow [so as to be able] to afford to collect the taxes to pay off the debt. That's still up to whether Japan undertakes the reforms.

Interviewed by Nikkei senior staff writer Hiroyuki Nishimura

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Get Unlimited access

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends April 30th

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to the Nikkei Asian Review has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media