Tim Kelly talks to economist Eisuke Sakakibara
Waseda professor, Eisuke Sakakibara, earned the nickname Mr Yen as vice- minister for finance between 1997 and 1999. He shares his views on deflation, the health of the Japanese economy and currency exchange rates.
What is causing deflation in Japan?
Traditional macroeconomics works on a kind of closed model, where central banks control prices to a substantial degree. However, if under globalisation corporations operate outside their national borders, then things are quite different. It becomes increasingly difficult for central banks to control prices within their own borders, and that is true of any country. Even the United States and Europe have been affected by countries like China and India, so that their price inflation is much lower than 10 years ago. They are in a state of disinflation [extremely low rates of inflation].
Why among the world’s industrialised nations has Japan been affected most by falling prices?
Japan is being increasingly integrated with Southeast Asia, and East Asia has become a sort of huge factory. A cross-border division of labour [spreading production through several countries] has developed in China, Thailand, Malaysia and Indonesia. Parts are produced in Thailand, for example, by importing materials from Japan and then sending those parts to China for assembly. This cross-border division of labour occurs all over East Asia.
One proof of that is intraregional trade in East Asia [ASEAN 10 plus China, South Korea and Japan], which has exceeded 57% of all the trade of the 13 countries. This is a big number. It was 40% in 1990. If this trend continues over the next five to 10 years, intraregional trade will reach 60%. The EU’s intraregional trade has been hovering around 65%, so 60% is quite a big number. We don’t have institutional arrangements yet, but markets and corporations have been driving integration in this area. Naturally, when two or more countries integrate, prices and wages tend to converge. Japan is the most developed among the ASEAN+3, so Japanese prices and wages tend to come down, while Chinese wages and prices go up.
How long will deflation last in Japan?
I would expect deflation to continue for some years, at least for the next five or six years. But this is mild deflation; we have not experienced any rampant deflation, or a deflationary syndrome connected to the deflation of asset prices. The Nikkei is all right and real estate prices have not really come down that much. I sympathise with (Bank of Japan) governor Shirakawa because he can’t do much, and he knows that.
How do you define mild deflation?
Let’s say between zero and minus two. Staying within that range, Japan at this moment, in terms of real growth rate for GDP, has the highest among developed countries. I wouldn’t say this is the most desirable state of affairs, but at least Japan is less ugly than the United States or Europe. We have recovered to the of pre-Lehman-shock level.
How should the Japanese government manage the economy?
We are in the process of recovery, so I wouldn’t mind seeing an expansionary fiscal policy continue to support the recovery. As far as government debt is concerned, we should not worry about it for at least another three to four years. Accumulated government debt is very large, close to 190% of GDP, but the financial wealth of the Japanese household is 300% of GDP in gross terms. Even in net terms it is around 240%, so we still have room to finance government debt.
The Japanese purchase 94% of Japanese government debt, so this is not an unhealthy situation at all. It is much healthier than the United States situation where close to 70% is being purchased by foreigners. However, the Japanese savings ratio has come down; it is below 5%, and the amount of government debt is increasing much more rapidly than savings, so we cannot have this kind of situation for long. Maybe within the next five to 10 years we need to have fiscal consolidation. Within the next five to 10 years we should raise the consumption tax.
What do you think of the government’s plans to raise benefits, including a monthly child allowance?
I think that is the right decision. Look at France; they have numerous child allowances. I think the best growth policy is to increase the population, and I think France has succeeded in that. We should create conditions where people feel that having two or three children would not be too difficult.
Why not a big government? Japan has a small government. The smallest government is in the United States. It’s something like 37% of GDP. In Japan it’s 42% or 43%. In France it’s 60%. Japan is like the United States in terms of the size of government, so they could increase more. The government should tell the public we will follow the European way, not the American way.
Do you think the current yen rate is fair?
It’s not unfair. Japan has been experiencing deflation and other countries have been inflating, so some kind of appreciation is inevitable. Ninety yen to the dollar at this moment is probably the ¥110 or ¥115 of 20 years ago. So I think Japanese companies can compete fairly well at this rate. For the time being, the yen-dollar will probably stay in that range but, if anything, the Japanese yen will appreciate against the euro and the yen-dollar rate may head to ¥85 slowly.