COVER STORY • 6Interview with Dr. Keiichiro Kobayashi, a Member of the Government Advisory Committee onCountermeasures Against the Coronavirus PandemicOutlook for the Japanese
Economy with the Delta
VariantBy Japan SPOTLIGHT
Dr. Keiichiro Kobayashi, a professor of the Department of Economics at Keio University, is a distinguishedJapanese economist and a member of the governmental advisory committee on countermeasures against
the coronavirus pandemic. He advises the government on how to contain the pandemic and restore theeconomy simultaneously. Japan SPOTLIGHT held the following interview with him.
(Interviewed on Sept. 7, 2021)

Role of Macroeconomic
Policy in Restoring Japanese
EconomyKobayashi: Yes. This is truly worldwide. We
have learned about the incomplete
effectiveness of vaccinations from theexperience of the United Kingdom and Israel.

JS: Though it has been said that thepandemic’s impact on themacroeconomy would bedisastrous, it seems to have been
far smaller than that of theFinancial Crisis in 2008. According
to the IMF outlook in July 2021, thekey to a stable recovery of the
global economy will be how quickly
vaccinations can be implementedaround the world. Most economists
are saying that macroeconomic
policies have so far worked well inminimizing the decline in nationaleconomies. Do you share this view?

JS: On consumption, as infections

decline could we expect to see arise in so-called pent-up demand,in particular in tourism? Or would
this take a long time to happen?

Kobayashi: At the least, I would say that
consumption growth will not be strong inNovember 2021. It could come back in thesecond half of 2022 or 2023, but with theincomplete effectiveness of vaccines andpossible emergence of new and more deadly
Dr. Keiichiro Kobayashi
variants, people would refrain fromconsumption, and in particular traveling.

Kobayashi: I think this is a bit obsolete. In recent months, we havenew evidence showing that the effects of vaccines are waning andwill not continue for more than six months. The vaccines’ infection
prevention effects do not seem to be so great in the case of the Delta
variant. So it may be difficult to restore the economy completely tohow it was before the pandemic even after an extensive vaccinationprogram in the country. In this situation, personal consumption will
not return to the level before the pandemic, as consumers will haveto live for a number of years with infectious disease
countermeasures. The economic growth rate in such a situation
would be steady but much lower than before.
JS: Is this true of the world economy as well as theJapanese one?

https://www.jef.or.jp/journal/

Possible Side-Effects of Current Monetary &Fiscal Policy
JS: Would the low interest rate policy andexpansionary fiscal policy adopted by the Japanese
government cause economic inefficiency tocontinue? What we call zombie companies could bewell maintained by such policies.

Kobayashi: Yes. The economy will continue to live with the pandemic
for several more years and among businesses such as restaurants orretail shops where face-to-face encounters are inevitable, only thosecapable of running their business profitably while also implementing
strict infectious disease countermeasures can survive. TheJapan SPOTLIGHT • November / December 2021

31

bankruptcies of those who cannot survive the pandemic areincreasing at this moment, but the Japanese government is now
trying to save those in difficulty with interest-free unsecured loans.
But 10-20% of those cannot survive even with them. Therefore, itwould be better for the Japanese government to stop these loans assoon as possible and let these businesses fail, while keeping its aid
for those earning profits in spite of the continued pandemic. Even for
those surviving, if the amount they borrow increases too much due
to interest-free unsecured loans, the government should reduce theirdebts to an appropriate level. With this policy, as in the case of nonperforming loans in the 1990s in Japan, equity capital in the banking
sector would be running short and write-offs would exacerbate thissituation. So I think capital injections of public funds from theJapanese government would be eventually needed.
At this moment, corporate debt has increased by more than 50
trillion yen in comparison with the pre-pandemic situation. Assumingthat 10-20% of this debt would be subject to write-offs as nonperforming loans, the scale of non-performing loans will be around
5-10 trillion yen, at maximum 20 trillion yen. This is much smaller
than the scale in the 1990s which exceeded 100 trillion yen. But I
think that without such a policy for zombie companies, theaccumulation of non-performing loans will prolong the stagnant
economy as in the 1990s and the whole economy will fall into adepression.
JS: Would continuing to aid these zombie companies

be positive in saving jobs in the long term?

Kobayashi: It depends upon how you help the companies. Withsubsidies or benefits, there would not be any borrowed money left intheir budgets, but in the case of Japan there are very few cases ofsubsidies as government aid and finance is used as a means to help
companies in most cases. So there would be loans left even after thepandemic is contained. They would have to streamline their businessto repay the loans in the long run, and that would lead to a fall in
employment.

Inequality Expanding in the Pandemic
JS: There is a divergence of economic performance

among sectors and individuals under the pandemic.
For example, the Information Technology sector iswinning, but restaurants and hotels have been
seriously damaged. How do you think this dividecould be mitigated?

Kobayashi: I think we should create a new social security system.
There must be two basic thoughts about this reform. First, we should
32 Japan SPOTLIGHT • November / December 2021

consolidate social security not only for the aged or children but also
for the working generation, assuming that this inequality isexpanding among workers. While those working for large companiesor the manufacturing industry are not suffering much from thepandemic, non-permanent workers for restaurants are paying a highcost. This is not an issue limited only to elderly people. We should
use this opportunity to create a social security system covering
equally both permanent and non-permanent employees, without any
discriminatory treatment, as it has only been protecting businessfirm employees so far.
For example, basic income support could be introduced.
Regardless of one’s working style, anybody could benefit from this,or in the case of tax exemptions with benefits, anybody could beguaranteed a minimum income by the government through negative
income tax. Subsidies would be provided to those with less than theminimum income, while those with income above the minimum level
would be taxed. This social security system would need to fill in thegaps between individuals.
To achieve this in Japan, digitalization is an urgent issue to befixed. The “My number” card, the Japanese social security number,should be linked to all individuals’ bank accounts. This might be arather drastic policy proposal in Japan, but with the tax bureau’saccess to private information on all individuals such as their monthly
salary, it would be possible to set up benefit provisions to thosesuffering from unexpected losses of income due to a pandemic or anatural disaster in the month following these unexpected incidents.
JS: Would it be possible to build such a system inlight of the protection of privacy?

Kobayashi: Yes, certainly, we should be able to do this. Privacy canbe an issue in Japan. However, in many European countries and theUnited States each individual is given a social security number andthey have to register it in opening a bank account. It is up toJapanese people to choose between protection of privacy and theconvenience of receiving benefits due to occasional unexpected lossof salary or jobs.
JS: How about capacity building to raise anindividual’s competency? Should the government
think about spending more wisely to contribute to an
efficient economy?

Kobayashi: Yes, that is true. But it depends upon the person.
Perhaps we would need to set up a minimum income level first toreduce the income gap and then help those searching for a new job.
It would be wise of the government to add a capacity-building
program to this basic income support.

Making Expanded Fiscal Deficit Sustainable

New Corporate Governance for a New Age

JS: With the fiscal debt expanding under theJS: In Japan, it has often been said that we should

Kobayashi: I think it is rational to increase fiscal expenditure for theinterests of the current generations, considering that they are paying
more cost due to the pandemic than future generations are likely to.
It will take another three or four years to bring the pandemic undercontrol, but I think it is inevitable to do this to save the current
generations from disaster. On the question of how to pay the cost ofthis, I do not think there is any other way but to increase theconsumption tax or decrease social welfare provisions for thecurrent generations and transfer the burden of cost to the future
generations for a long time. But another way could be to create aninternational fiscal cooperation system with a global common tax
enabling each national government to finance its increasing debt
stemming from countermeasures to deal with the pandemic bydistributing revenue from this common tax. The consensus achieved
recently among the G7 nations setting 15% as the minimum
corporate tax rate is one example. I believe we should propose
similar initiatives as promptly as possible.
For example, if one country imposes an environmental tax onenterprises active in the country, those enterprises would transfer
their factories to another country. In this case, this government
would not get the environmental tax revenue, but if all the nations in
the world impose environmental tax at a common tax rate,
enterprises cannot transfer their factories anywhere to escape thetax. This is how any government could earn tax revenue. This
revenue could be equally distributed among nations and with thisextra revenue they could pay back the debt accumulated due to thecountermeasures against the pandemic.
Such an idea of a global common tax could be applied totransactions of financial assets as well. This global common tax
could possibly be implemented by international policy cooperation,
which could be considered as a new Bretton Woods system in the21st century. On the occasion of the birth of today’s Bretton Woods
system in 1944, international cooperation mechanisms such as theWorld Bank, the IMF or the Bank for International Settlement (BIS)
were created, but they could not achieve international cooperation on
fiscal policy, as that is a matter of sovereignty. This time, as national
debts are increasing all over the world in coping with the pandemic,
we should pursue such international cooperation on tax and fiscal
policy, even though it would force a nation to give up nationalsovereignty to a certain extent.

Kobayashi: In Japan, until the 2010s, a shareholder’s interest was
not much considered, given the low interest rate businessenvironment. In the 2010s, there were initiatives to strengthen
corporate governance by considering a shareholder’s interest, suchas a stewardship code or corporate governance code. The purpose of
those initiatives was to raise the efficiency of corporate management
by introducing disciplines to maximize a shareholder’s interest. But
with this situation unchanged even as of now, I assume it will still benecessary to continue efforts to raise efficiency.
With higher efficiency, companies could earn larger profits. This isobvious. The next question must be how this increase in profits is tobe shared. In the argument in the 2010s, the allocation of profits forshareholders was to be maximized in raising ROE. But in the current
discussions in Europe and the US, it is necessary to increase theshare of the stakeholders. In the case of Japan, I think the Japanesecompanies are not yet quite successful in maximizing their profits. At
this stage, if they consider the issue of allocation of earnings toomuch, their management efficiency would decline again and return tothe original level.
Looking back at the history of Japanese business, assuming that
efficiency of management is to be achieved by strengthening thediscipline of the board members and employees, before the 1990s it
had been debt governance by the banks that loaned money to thecompanies that led the governance of corporate management. But
since then, with the decline of the banks’ leadership in corporate
governance, there have been very few institutes disciplining themanagement during these three decades. Under such circumstances,
there emerged initiatives to discipline the management andemployees with strengthened rules on respecting a shareholder’sinterest. Who would discipline the management and employees otherthan shareholders? There does not seem to be a best answer to thisquestion in Japan. What I can say at this stage is that less respect fora shareholder’s interest will not result in anything but inefficiency ofcorporate management and decline of growth in Japan. This is myconcern.

pandemic, the gap between generations will furtherincrease. Assuming that the pandemic will continue,is this going to be a challenge for a long time?

establish ROE-oriented corporate governance tomaximize shareholders’ interests. Now, whether due
to the pandemic or not, with growing interest insocially common issues such as human rights and aclean environment, corporate management does
seem to be changing to a stakeholder-oriented one.
How do you assess this change of thinking in
corporate governance as an economist?

Japan SPOTLIGHT • November / December 2021

33

JS: We would need a balanced approach to this issue

in respecting both a shareholder’s interest and astakeholder’s interest.

Kobayashi: We would need to raise efficiency first and then change
the allocation of earnings. This is most important.

Maximizing the Benefits of Digitalization
JS: If this pandemic continues for as long as youmentioned, it will be necessary to maximize thebenefits of the changes triggered by the pandemic tomake them sources of new growth potential.
Examples of such changes are digitalization andreforms of working style. With high growth potential,
there would be positive effects not only on theeconomy but also on public finances. What kind ofstructural economic reforms would be necessary to
maximize this positive effect?

Kobayashi: Digitalization would certainly raise productivity andgrowth potential. Whether teleworking promoted by digitalization
would raise productivity or not, cannot be answered clearly. With
commuting time reduced, productivity could be raised, but with thereduced human communication, it could be lowered. The answer isambiguous. I hope companies can find a working style leading to arise of productivity even with teleworking.
JS: It is often pointed out that accommodating abusiness environment that maintains open
competition would lead to better outcomes. Do youagree?

Kobayashi: Yes. Open competition with the freedom to engage intrial and error in business would lead to better outcomes. For
example, there are many regulations in labor markets and withregulatory reform enabling a company to change its working style atits own discretion, we could see what kind of working style could
raise productivity and growth potential.

government would raise the growth potential in the
post-pandemic era. What do you think about thispoint? Initiatives like reforms of corporate
governance for the interests of stakeholders orEnvironment, Social & Governance (ESG) investment
are certainly necessary to raising common social
values, but too much consideration of these values
could lead to inefficiency and poor economic
performance.
Kobayashi: Authoritarianism might be better in leading a nation in
one single direction in a short time. But over the longer term of
several decades, democracy could survive more easily and be more
resilient to any change of environment, since in democratic nations
there is a freedom for an individual to engage in trial and error, and agovernment can do this as well and thus correct erroneous policies.
Authoritarian regimes could be vulnerable to a variety of changes ofenvironment, even though they are successful in a certain type ofcrisis management. Democratic nations are better in terms offlexibility by taking advantage of the diversity of views and thinking
that enable them to change their administrations and leaders.

Japanese Economy in 2022
JS: Finally, could you please introduce your outlook

for the Japanese economy in 2022?

Kobayashi: The pandemic will continue in 2022 and perhaps even in2023 and 2024 as well, since with much more infectious variants
emerging even vaccines will not stop the pandemic spreading
completely. In the light of this long-term battle against Covid-19, we
will need to think about economic policy and business. In 2022, I
hope that enterprises and individuals will be ready for this long-term
battle and adjust their activities accordingly. If so, I think growth inJapan in 2022 will be steady and stable even with the unexpectedarrival of new variants. We cannot expect high growth andconsumption growth will be moderate as consumers will continue tobe vigilant against infections. Pent-up demand for tourism will not
return fully but only gradually. The overall growth of Japan in 2022
will be low but steady.

Democracy vs Authoritarianism
JS: As you know, authoritarian governments seem tohave been successful in containing the pandemic bycomplete lockdowns of big cities and have won
support for this. But there are still many advantagesof democracy. For example, as you said, open andfree competition maintained by a democratic

34 Japan SPOTLIGHT • November / December 2021

Written by Naoyuki Haraoka, editor-in-chief of Japan SPOTLIGHT, with theassistance of TapeRewrite Cooperation.