"CEAC Commentary" introduces news analyses andopinions in Japan on topics related to regional
cooperation and integration in East Asia, but they do
not represent the views of CEAC as an institution.

February 28, 2013

Japanese Economy Should Set out to "Regain theLead over China"
By TAMURA Hideo
Year 2013 started in full swing. The stock market is so roaring that it is hard to believe
it has chronically been in a slump. Prime Minister ABE Shinzo has only to give voice toʺdefeating the deflation and reversing the value of the yenʺ to make them happen. While Prime
Minister hardly spent a penny, the foreign exchange market, hitherto utterly unresponsive to aseries of 10‐trillion‐yen monetary easing steps introduced by the Bank of Japan, suddenly
shifted to depreciation of the yen and the stock market began to absorb huge amounts of money.
Tailwinds also blow from abroad. The United States, for now, avoided falling off the ʺfiscal
cliff,ʺ and in Europe, Greece, EUʹs troubled child, narrowly escaped the abyss of severe debt
crisis. It seems that Japan has the rare opportunity to revitalize its economy. Problem is whatlies ahead.

What should be done? Naturally, the Bank of Japan should first set an inflation target.
The inflation target of 2%, for example, would convey a clear message that the Bank of Japan
will keep printing more money to pump ultra‐low interest funds into the financial market until
the price levels goes up by 2%. Then, the yen appreciation would tend to be stemmed andprospects of corporate earnings would dramatically be improved. The stock price would also
start its upward journey. The Abe administration should keep watchful eyes on Bank of Japan
Governor SHIRAKAWA Masaaki, who wants to remain evasive on the inflation target, andshould work out a joint accord between the government and the Bank of Japan. However, that is
not enough to give Japan more punch. For, Japan has disastrously spoiled itself with the ʺtwolost decadesʺ since the burst of the bubble economy. The media repeatedly tries to fuelimaginary fear of a virulent inflation, saying that price rise would be a disaster.

The common sense of economics of the world that an inflation target means to increase
income and employment more than the rate of price rise is routinely disparaged as fantasy inthis country. In short, todayʹs Japan is riddled with shriveled mode of thought which has been
fostered as its nominal gross domestic product (GDP) has been contracted by 10% in fourteen
years. Officials in the Ministry of Finance, without any reflection on their past failure that thetax raise accelerated the deflation and ended up in decline in tax revenue, are still enamoredwith a plot to raise the consumption tax. Majority of the online public opinion turned
completely inward‐looking and abusively criticize proponents of joining the Trans‐PacificStrategic Economic Partnership (TPP), insisting that TPP would destroy Japanʹs agriculture andmedical care system. In order to realize full‐fledged revival, Japan must undermine theconventional wisdom and policies thereby turning to an aggressive strategy under bold politicalleadership. In this regard, Bank of Japanʹs inflation target would only be one chapter of Japanʹsoverall rollback scheme. Substantial large‐scale public spending together with monetary easing
would kick fiscal operations and financial activities into high gear toward a path out of adeflationary spiral.

What should Japanʹs rollback scheme be aimed at? Adding 3‐4% to nominal GDP growthrate sounds good. But it is just a means to an end. Let me suggest that Japan should set its goalof regaining the lead over China in terms of nominal GDP. China surpassed Japan in nominal
GDP as stated in U.S. dollars in 2010. The biggest factor other than growth rate is Chinaʹsaccelerated inflation as contrasted to Japanʹs long‐running deflation. Actually, Japan, as of year
2011, far exceeded China by 42% in real GDP reflecting price changes based on year 2000 prices.
If Japan could return to a proper growth track enjoying a healthy inflation rate, its economy
would for sure regain the lead over that of China both in name and in reality. Then, the Japanesepublic would gain much self‐confidence from the recovered national strength, earn trust fromthe United States and a sense of reverence from other Asian nations.

(This is an English translation of the article written by Mr. TAMURA Hideo, Journalist,
which originally appeared on the BBS “Hyakka-Somei” of CEAC on January 18, 2012.)