No. 29 — July 28, 2000

 

Weekly Review

EPA WHITE PAPER TAKES THE LONG VIEW
--- by Douglas Ostrom

The Economic Planning Agency's annual economic white paper typically discusses both short-term and long-run economic developments — a tradition upheld by this year's edition, issued July 14. Yet the report's authors, clearly sensing the transition from one era to another, emphasized long-range prospects far more than in previous versions.

The change in perspective is understandable. Depending on the point of view, 2000 is either the first year of a new century or the last year of the old one. Moreover, this economic white paper is the final one. With next January's reorganization of the central government bureaucracy, EPA will be folded into a new Cabinet Office (see JEI Report No. 27B, July 16, 1999).

For whatever reason, EPA's perspective in the 2000 edition stretched back to the Meiji period (1868-1912). The changes affecting the Japanese economy since that time have been dramatic by any standard. EPA noted that between 1885 and 1998, per capita price-adjusted output soared by a factor of 28. Moreover, the primary sector (agriculture, forestry and fisheries) contracted to just 1.7 percent of economic activity in 1998 from 45.2 percent in 1885. In contrast, manufacturing's contribution expanded from 10.7 percent to a peak of 34.9 percent in 1970 before falling to 22.6 percent. Services shrank from 40.2 percent in 1885 to 33.8 percent in 1940 before rising steadily to an all-time high of 66.7 percent of total output in 1998.

Of course, the technology used to produce output changed substantially as well. According to EPA, this radical transformation had three particularly salient characteristics: the nurturing of human resources, the careful absorption of foreign ideas in a manner consistent with the Japanese situation and the development of keizai honshitsu (economic essence) that corresponded to the nation's stages of economic development.

These ideas set the stage for the major theme of this year's economic white paper: the critical role of information technology, which, coincidentally or not, also was a subject that loomed large at the July 21-23 summit of the leaders of the Group of Seven industrial nations plus Russia on Okinawa. The report's authors implied that computers, the Internet and the like will reshape Japan's economy in the 21st century and beyond, just as steam, electric power and cars transformed it over the last century or so.

While EPA figures that the IT revolution began in Japan, as it did in the United States, in the last half of the 1990s, others might disagree. For one thing, the agency should dust off its own reports from the 1970s when information-intensive technology was highlighted as both descriptive of and a prescription for the Japanese economy. More recently, many analysts have suggested that Japan missed much of the IT revolution, in part because its economy was mired in stagnation for most of the 1990s.

EPA was careful, in fact, not to make the leap from the assumed growth benefits of the IT revolution to a declaration of victory in Japan's battle to regain short-term economic momentum. It admitted, for example, that the hike in the consumption tax and other tax-like payments in 1997 was a mistake. While agency analysts now see signs of a sustained recovery, consumer spending is a major trouble spot. Furthermore, action to address the concern that led to the 1997 tax increases — current and projected fiscal imbalances — is premature in light of the economy's still-fragile situation.

In the weeks since the white paper was drafted, the economic data released have, if anything, strengthened the case for caution. Consumer spending remains weak, as exemplified by yet another year-on-year monthly drop in department store sales in June. More generally, this year's statistics suggest that while Japan's recovery continues, the pace is slower than before. Industrial output, for instance, still is rising but at a declining month-to-month seasonally adjusted rate. Also, while unemployment dropped to 4.6 percent in May from 4.8 percent in April, the ratio of job openings to job-seekers, an alternative measure of the state of the labor market, was a seasonally adjusted 0.56, the same as in April, which represented the most optimistic reading in two years.

All in all, the 2000 economic white paper was an attempt at cheerleading for the long-beleaguered Japanese economy. The report's reference point of 100-plus years ago showed how far Japan has come, with the suggestion that it can do so again. More than once, EPA analysts pointed out certain national characteristics, such as a low crime rate and an ability to develop commercial products, that compare favorably with the United States. In any case, they claimed that the IT revolution will propel the world's second-largest economy to a bright future.

Contributors to the report admittedly were careful to note the many policy changes required to make EPA's vision come true — including a reduction in information-access costs, an apparent allusion to the recently concluded agreement with the United States to lower local and regional interconnect fees for communications carriers (see JEI Report No. 28B, July 21, 2000). Moreover, they admitted that Japan's public-sector deficit — the world's largest — is unsustainable over the long term and will need to be addressed. Nonetheless, the writers of the 2000 economic white paper obviously feel that Japan already has taken important steps and will manage the remaining ones in such a way that 100 years from now, any retrospective will be as sunny as EPA's final annual economic report.

The views expressed in this report are those of the author
and do not necessarily represent those of the Japan Economic Institute

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