IMF Remedies for Japan's `Post-Bubble Blues'
A Letter to the Editor
By Yusuke Horiguchi
Asia and Pacific Department, IMF
July 31, 2000
Reproduced with permission of Business Week
Your speculation about an IMF rescue of Japan five years down the road ("The Tsunami Threatening Japan," July 10) seems far-fetched given the country's foreign reserves of well over $300 billion and its consistently large current account surpluses.
But we have been paying close attention to Japan's economic difficulties in recent years, both for their own sake and for their impact on the rest of Asia and the world economy. Just last month an IMF team was in Tokyo to discuss the policy challenges, an exercise we conduct regularly with each of our 182 member countries. Important steps have already been taken to avoid your nightmare scenario. Nonetheless, more needs to be done.
Japan is still suffering from the "post-bubble blues." Corporations remain over-indebted and burdened with too much capital stock. Meanwhile, the banking system is still unable to fulfill its normal functions. Our advice to the government is two-fold:
First, strong macroeconomic life support is still needed. While the rapid accumulation of public debt is a serious problem, fiscal tightening would be premature while the economy remains fragile. Large-scale fiscal adjustment will eventually be required-and your article provides some excellent suggestions. But it will be hard to achieve until growth is firmly re-established. Similarly, the Bank of Japan should maintain zero interest rates until recovery is locked in. We are not there yet.
Second, the authorities need to continue vigorous structural reforms. In particular, they should finish fixing the financial system, removing barriers to competition and putting in place a legal and tax framework conducive to corporate restructuring. They should also extend deregulation across the economy and update tax codes. This job has started, but not yet been completed.
With policy initiatives like these Japan can once again deliver rising prosperity for its citizens and become a source of strength for the world economy.