The government’s purpose is to ease the insecurities of the Japanese people, but also to make Japan “the fastest among the developed countries to escape the current recession.” To that end, Mr. Aso promised ten trillion yen (around $109.7 billion) in countermeasures for employment and business finances, including one trillion yen in residence and capital investment taxes. He promised thirteen trillion yen (around $142.7 billion) for shorimg up the financial system.
On employment, he focused particular attention on the plight of irregular and part-time employees, promising to create employment opportunities in rural areas. He pledged that the forthcoming budget will offer assistance to these workers in finding new employment, and will increase subsidies to local governments by one trillion yen in order to promote job creation.
The new plan’s assistance for financial institutions adds an additional ten trillion yen to the two trillion included in the assistance bill that just passed the Diet, with an eye toward encouraging banks — particularly banks in rural areas — to resume lending to firms, especially small- and medium-sized enterprises.
But the impression one gets is that Mr. Aso’s latest plan is lots of trees, no forest. Coverage has focused on the sheer scale of the package, although it’s not clear just how much the second stimulus package will total, because the prime minister was unclear which figures are totaled in other figures and which constitute separate categories of spending. If other governments are improvising their responses to their respective economic crises (as argued by John Gapper in the Financial Times), Mr. Aso’s approach seems to amount mostly to throwing ideas against the wall in the hope that something sticks. For all the pieces of the new plan, it amounts mostly to hope: hope that the government’s subsidies for local governments will create more jobs, hope that banks will start lending upon being shored up by government funds, hope that tax cuts can get businesses and homeowners investing again. It is unclear how the government plans to stimulate consumer demand to replace slack demand from abroad — demand that is unlikely to return anytime soon if the yen stays as strong as it is for any considerable length of time.
It’s all well and good that Mr. Aso appreciates the importance of saving rural Japan and preventing the emergence of yet another lost decade, but perhaps the time to do that was in the “longest postwar expansion.” Now, in the midst of what government officials repeatedly call “the worst crisis in a century,” it is uncertain whether fiscal policy will have any effect whatsoever. It certainly won’t in time to reverse the downturn before the LDP has to face the voters. The government faces the monumental task of solving Keynes’s paradox of thrift, getting the public to spend at the same time that it is bombarded with bad economic news that has the effect of discouraging consumption.
There’s also the question of how the government will pay for its new commitments. The prime minister insisted that the government will not depend on bonds to cover the new stimulus, turning instead to the unemployment insurance special account and the Fiscal Investment and Loan program (FILP). But the tax question will not go away. This is hardly the time for the LDP to increase taxes, and it’s understandable that Mr. Aso is reluctant to commit to a date for comprehensive tax reform and a consumption tax increase. Doing so can only worsen his political prospects. Why should he commit to a tax increase in 2011 when he may not even be prime minister, considering that he could suffer political consequences in 2009 as a result of his pledge? (Yosano Kaoru, his economy minister, is reportedly outraged at the prime minister’s inability to commit.)
The government has little choice but to throw caution to the wind in the hope that somehow, miracuously, the economy recovers. Not to reopen the debate about whether Japan or the US is in worse straits, but Japan truly appears to be teetering on the brink of disaster. I don’t mean merely another lost decade or a depression. I mean slouching to irrelevance. Another prolonged downturn could mean another lost generation, with questionable job prospects and correspondingly low ambition. Another lost generation will only compound Japan’s demographic crisis. Fewer steady jobs presumably means fewer Japanese getting married and having children. Hokkaido University’s Yamaguchi Jiro, writing about the employment crisis, argues that it’s essential for Japanese to reconsider the meaning of work. True, but will that reconsideration happen in time to rescue Japan?
This is the great failure of the Aso government. Faced with a widespread and deepening crisis, the government has offered a cobbled-together plan that may only entail suffering firms to limp on until the next crisis. Mr. Aso has not, however, offered a compelling intellectual framework for a post-crisis Japanese economy. Rural Japan is in desperate need for some scheme to ensure future prosperity — public works and agriculture will no longer suffice. Perhaps it’s too difficult a question to ask of the government when it is simply trying to stanch the bleeding, but at some point the government (or a government) will have to answer it.