[interview] Responding to the questions posed in the Economist Conference of Genron NPO.

Heizo Takenaka: Minister of State for Economic and Fiscal Policies

Born: 1951, BA in Economics, Hitotsubashi University
Career: 1973 Joined The Japan Development Bank
1982 Senior Economist, Institute of Fiscal and Monetary Policy, Ministry of Finance
1989 Visiting Associate Professor, Harvard University
1996 Professor, Faculty of Policy Management, Keio University
Recent Activities:
A member of the Economic Strategy Council (an advisory body for then PM Obuchi) and the IT Strategy Council (an advisory body for former PM Mori)

The following are questions to State Minister (Economic and Fiscal Policy, Internet Fair 2001 Japan, IT Policy) Takenaka:

1. What is the goal of the Japanese government's macro economic policy under the current deflation? Does the Bank of Japan have the same policy target? What kind of cooperative system is required to bring their targets in line? Do you intend to stick to the idea of preventing negative growth to the end or rather focus on heading off a deflationary spiral?

2. If the government is to establish a policy target for the Bank of Japan, is the target going to be the inflation rate, price levels, or the nominal economic growth rate? Don't you think the introduction of a quantitative relaxation contradicts the efforts to reduce supply capacity? Some people argue that what really needs to be done is raising interest rates. What do you think about this opinion?

3. If tax revenue is less than what the government expects, and 30 trillion yen from the sales of government bonds is insufficient to cover that shortfall, is the government going to expand the 30-trillion-yen limit or would it rather put a cap on expenditures and stick to the 30-trillion-yen limit? In the current deflation the government seems to be putting more importance on fiscal reform than the disposal of non-performing loans. What do you think about this priority?

4. Does the government plan to lower regulated prices by reducing taxes and telephone rates, or will it promote the deregulation of communication fees?

5. Does the government plan to take a stronger leadership role in accelerating the disposal of bad loans and in dealing with excessive debts, which underlie the bad loans? Why was the previously proposed Industrial Revitalization Committee dropped from the list of planned undertakings? We think that the government should no longer be laissez faire, the prevalent attitude of the 1990s; rather it should take the lead in implementing industrial policy. What do you think about this? If a bank were nationalized, how would the government deal with the bank and its debtors?

6. Why doesn't the government drastically expand unemployment insurance (to extend the period of benefits)?

7. People in markets criticize the government for slow progress of structural reform. How do you respond to them?

8. If some people reversed their positions on the schedule of reforms and opposed it during the legislation process on that basis, what kind of penalties would you impose on them?

KUDO: I would like to start this interview by asking State Minister Takenaka questions presented at our meeting of economists. First of all, given the bleak situation surrounding our economy, there was some strong disagreement as to whether we should, or should not, accept the negative real growth ratio. What do you think in this regard?

Is Negative Growth Ratio Unavoidable?

TAKENAKA: We are going to make efforts to avoid negative growth. However, it will no longer be policy to resist negative growth ratio by force. Negative growth brings with it austere circumstances, therefore we have to be ready to encounter this reality.

KUDO: How about a deflation spiral? Is there no choice but to accept a deflation spiral?

TAKENAKA: In light of the fact that we need the adjustment in our balance sheet, it is too painful to leave deflation as it is. I would like to set a policy goal of preventing deflation. To this end the government has to create real demand and on the heels of this the financial authorities need to inject money. These joint actions, I think, are necessary.

Political Meaning of Capping New Bond Issuance at 30 Trillion Yen

KUDO: Regarding the means of implementing the above, opinions were varied. One argument is that limiting the framework of bond issue within 30 trillion yen is not commensurate with a negative growth rate situation. This question was posed by Mr. Yuji Shimanaka.

Mr. Robert Feldman would like to know how the government would deal with the following case: If the government finds itself unable to keep its promised limit of 30 trillion yen due to the lack of tax revenue, will the government increase the bond issuance or rein in expenditures.

What is your response to this question?

TAKENAKA: The agreement to limit bond issuance to 30 trillion yen is a very political issue. As a political symbol, the attempt to limit bond issuance to 30 trillion yen is necessary to demonstrate the political force behind it.

KUDO: If there is a lack of tax revenue, does the government increase bond issuance or reduce the ceiling on expenditures?

TAKENAKA: Politically, this is a target we need to defend, therefore we will create the circumstances under which we can meet the goal.

KUDO: What you meant is that the government is going to reduce the expenditure ceiling.

TAKENAKA: I do not know yet.

How to Increase Our Nation's Buying Power

KUDO: With respect to fiscal policy, there was an argument that the government should take into consideration tax reduction as opposed to spending more on public works. In this regard, Mr. Jasper Koll argued that in order to increase the buying power of consumers, it is necessary to reduce regulated prices, such as telephone charges or the charge to connect to the Internet, and to set a time frame for this measure.

TAKENAKA: Basically, we have no intention to increase public works spending. This is clear. What we need to do, first of all, is to spend money for the safety net, or for IT sector or revitalization of our cities-these are our priority areas and these are the areas in which we will spend as much money as we can.

KUDO: Is there no active discussion within the government over a program to increase consumers' buying force by reducing the price of telephone charges or Internet connection charge?

TAKENAKA: We approach this issue from the point of view of deregulation. The government can not directly control these prices.

KUDO: Concerning monetary policy, some expressed the argument that when money does not flow, quantitative relaxation does not make sense. In addition, Mr. Kazuo Mizuno said that to promote exceeding supply through raising interest rates would match the current structural reform.

TAKENAKA: When Japan is in deflation, as it is now, the nominal interest rate is low whereas the real interest rate is high. We naturally have to think about setting a policy to raise the overall level of prices to some level. Under this condition, the nominal interest rate would increase but less than that of commodity prices. Then the real interest rate would decrease. By raising the nominal interest rate, it is necessary to allocate our resources in a truly effective way. Because under a zero interest rate, a corporation that wastes its money can survive.

Do the Government and the Bank of Japan Work Together?

KUDO: As a policy, the government would like to avoid negative growth and a deflation spiral. To this end, I wonder whether the government and the Bank of Japan work together.

TAKENAKA: They don't work together yet. Upholding the goal to thwart deflation, I have personally argued that we should constructively discuss the roles of the government and the Bank of Japan. At the Council of Economic and Fiscal Policy, I plan to discuss the issue of preventing deflation. In the course of these discussions, there could be an opinion over sharing the roles we play. On the other hand, there is an opinion that the Bank of Japan is independent.Å° Plans for mid-term economic and fiscal policiesKudo: Mr. Yuji Shimanaka posed a question as to what the government will set as the Bank of Japan's policy objective, target for inflation or a nominal growth rate? How would you respond to this point?Takenaka: As a matter of the fact, we have not discussed this in detail. Nevertheless, the time to debate this issue will arrive soon when the government compiles the mid-term economic and fiscal policies. By doing this, the government will paint a clear picture of mid-term measures by the end of this year or this coming January. This scheme is unprecedented for the government in that consistency exists between macroeconomic measures and fiscal policies.Government reaction to the appearance of opposition.Kudo: Mr. Robert Feldman asked how the government deals with the situation, if opposition arises against the Koizumi administration's plans to carry out the reform according to this scenario.

TAKENAKA: The Prime Minister is prepared to exercise the right to make decisions on personnel. The reform schedule has already made submissions to each agency and the Council of Economic and Fiscal Policy and reported to the cabinet. This means that the officials in charge of reform must assume their responsibility for their actions even in those cases where they cannot complete their tasks.

KUDO: Regarding the reform scenario, since the economy has deteriorated to the current unfavorable situation, we have to choose the least worst out of a number of unpleasant options. Nevertheless I think the government should take the initiative in putting forward several schemes to solve the problems, and not take a laissez-faire policy toward the economy. The consensus of the economists' discussion was that Japan needs the establishment of such a system.We have discussed the resolution of those issues involving heavily indebted companies, which underlie the problem of non-performing loans. For example, some suggested that the government set up a Industrial Reconstruction Committee.Takenaka: It is a tricky problem to solve because there is a real question as to whether the government should be involved in such a way. In particular there is the matter of the mechanism, should the government order each company to do this and that? I do not think the government has the capacity to do such a thing.

Therefore the current situation necessitates the mechanism in which banks monitor companies and the Financial Services Agency monitors banks. This is a normal mechanism. The government will not be able to take care of every bankrupt firm.Government involvement and the disposal of the bad loans Kudo: Considering the Financial Services Agency's role, the government injected public funds into the economy by purchasing preferred stock on the premise that the funds can be redeemed. Such a method, however, does not work well because it engenders distrust toward the government's systems and bank management; distrust that has reached the present critical phase. Some argue that the government should be more active in resolving these issues. What do you think about these views?Takenaka: I very much understand the opinion that Japan should implement only those policies that are necessary now and stop doing what has been done in the past. Since no nation in the world has ever tackled such a deep-seated bad loan problem, there is no way to predict what will happen, anything could happen. Therefore, it makes no sense to blame the government for the situation or the result. The government should only do what is required now. This is the reason why the Prime Minister told us to just produce results. The council on Economic and Fiscal Policy will judge whether or not the outcome is put forward.

The Prime Minister will also ask the Financial Services Agency to take its responsibilities. This is one evidence that the mechanism functions well. The Prime Minster's remark, "Just produce results" carries significant implications.

KUDO: In the future if banks are nationalized due to the conversion of preferred stock to common stock, how will the government control them ? It's obvious those banks are linked with the debtor problem, but in principle it should be monitored by the private sector.

TAKENAKA: If those banks are nationalized practically, it's easy situation. The government can simultaneously be the creditor and supervise those banks.

KUDO: Is it possible, in some cases, for the creditor to become the management ?

TAKENAKA: Yes, it's possible.

KUDO: Some have asked how the government can convince the nation that the Financial Supervisory Agency will strictly enforce the method for classifying debtors. In addition, Mr. Naito said asset assessment cannot be easily undertaken under conditions of deflation but it must be totally undertaken, thus we can't rely on its being accomplished.

TAKENAKA: One can either have an interested party review or a market review. It's really difficult to answer which is best. If I were asked whether the market review is really best, there are still some points on which I am unsure. But in fact it is certain that there is a difference between interested party review and market review, as was clearly demonstrated by the Mycal Corporation bankruptcy. I have no idea which is correct, but the difference is an important problem. We have no choice but admit it.

It is the government's responsibility to assess the problem and we must leave it to the Financial Supervisory Agency to make that judgement. That's why the Prime Minister said "Just produce results." We have to give it three to six months to see whether the market appraisal of the disposal of bad loans is positive or negative, and if it is the latter we can say that method is the wrong one.

Should the government conduct the industrial policy mainly ?

KUDO: The government is presently proceeding with structural reform in various ways, including industrial adjustment. Mr.Masuda said the government should take the same initiative in the industrial policy as it has in industrial adjustment and not flinch at excessive laissez faire thinking. What do you think about this?

TAKENAKA: I think it's worth consideration. The U.S.A. simultaneously engages in industrial specific polix to a considerable extent as well as maintaining extremely free competition. I think there is room for industrial specific manipulation in Japan. Regardless of that, there are still conservative encumbrances here. Before anything else we must liberate things from those encumbrances.

KUDO: Three radical ideas for industrial reorganization used to be hot topics, the council for industrial competitiveness, dead equity swaps, and corporate separation were discussed, but nothing has changed. At that time, regardless of the Financial Supervisory Agency addressing the financial issues, there was little success and the problem was set aside so that it still remains. Does that mean we would once again fail to resolve it as an actual problem?

TAKENAKA: That is a problem of a totally different dimension. We cannot afford to discuss whether it's possible to solve this problem. We must resolve it. Any policy we adopt would present the same problems.

Does unemployment compensation insurance need to be improved ?

KUDO: It is time that we began structural reform. Why doesn't the government improve unemployment compensation insurance ? This is Mr.Masuda's opinion, too.

TAKENAKA: As far as I know, labor economists are widely divided in their opinions concerning this issue. On the one hand, they have the opinion that given the seriousness of the current situation it would be better to extend the payment period. People would understand that policy easily and feel a sense of relief. On the other hand, some people who have carefully examined the labor market, point out a consistent pattern. If the payment period is extended, people will simply wait longer until expiry date of the payment period. If the payment period is fixed at a year, they will look for work after a year. If two years, they will look for after two years. That's why the governments keep trying to shorten the payment period in Europe.

KUDO: Thank you for your time.