What Japan must do to open economy

Press, 13 May 1987, Page 20

What Japan must do to open economy

IN A WEEK that began with the Tokyo stockmarket losing 4 per cent of its value in a day, and ending with Mr Yasuhiro Nakasone’s anxious visit to Washington, some people wondered whether the world was heading for a financial disaster or a trade war. Both are avoidable, provided political leaders will actually lead. What that means for the United States is tediously familiar; steady reductions in the budget deficit. For Japan, the issue is more difficult because the medium-term answers are less well-known — and politically much more challenging. Part of America’s (and Western Europe’s) unhappiness with Japan’s gigantic trade surplus — around $9O billion last year — comes from the success of the Japanese export machine. A bigger part comes from Japan’s reluctance to buy foreign goods and services.

stamp paddies, and selling it to Japanese consumers for six or eight times the world retail price. Even when imports of food are allowed, the Government makes sure there will be no undue competition for expensive rice: American wheat is landed in Japan for SUSI3O a tonne, but then sold to millers for SUSS2S. Japan’s policy of protecting its rice farmers at all costs has contributed mightily to a second great nonsense: the astronomical price of land. The 122 million Japanese live in a small mountainous country only a third of which is habitable. Almost half the habitable land is devoted to farming, ,and half of that to growing rice. In Japan last year, an acre of rice paddy cost the equivalent of SUS3O,OOO; in California, it could have been bought for SUSI6OO.

Such distortions have little to do with Japan’s physical crowding. To the effects of the rice subsidy are added property-tax policies that reward holding land as “farmland” even when it is not; capital-gains taxes that discourage sales of land to developers; and zoning regulations — especially a rigid protection of the right to sunshine — which keep Tokyo absurdly low-rise. The result is that a square metre of residential land in metropolitan Tokyo costs an average of SUS24OO at today’s exchange rates, and business land an average of $U526,000; land in downtown Tokyo costs more than nine times as much as land in midtown Manhattan. The average price of a house or flat in a middle-class district of Tokyo is between seven and ten times the annual pre-tax earnings of its owner; in most Western cities, the multiple is only four or five, for a home that is at least twice the size. The difference in housing costs is one big reason why Japan’s savings rate is much the highest of any O.E.C.D. country.

Its imports last year were only 60 per cent of the value of its exports; for West Germany, the other country with a large surplus, the ratio was nearly 80 per cent. Japan’s import anorexia has little to do with the trade barriers that Westerners so love to criticise. Its two main causes have been the yen’s low exchange rate, now a thing of the past, and the thriftiness-cum-enforced poverty of Japanese consumers. Freeing them to spend more would be the surest ,way to a lasting trade,peace. The Japanese spend around a third of their disposable incomes on food, more than twice as much as Americans do and half as much again as West Germans. A tonne of Californian rice will cost SUSIBO loaded on a ship in Los Angeles bound for Japan. It will never get there. Across the Pacific the Japanese Government forbids anybody to import rice, and is meanwhile paying its' inefficient farmers around SUS2OOO a tonne for the rice they grow on their postage-

The rice policy does not just

block imports directly; it diverts money to the high-saving and conservative rural minority, away from the urban majority who would be most ready to experiment with Western goods. One Japanese economist guesses that if consumer spending on food were reduced even to West Germany’s level, extra spending on other things would equal about 2-3 per cent of Japan’s G.N.P. — and around one-fifth of that would go on imports. A removal of restrictions on land might have even bigger effects. The high yen will help spur some change, it is already making the Japanese restive about not seeing in their retail prices any of the benefit of the yen’s greater purchasing power on world markets. The longer the discrepancies go on, the sronger the pressure will be for a change. But that in itself, will not be enough. Ask Mr Nakasone. Last summer he won one of the biggest election victories in post-1945 Japan; he landed in Washington

“ 7X* M Venn. The ‘Economist* outlines the steps r a a qe should take to satisfy his trading partners -\ -

a couple of weeks ago a nearlame duck. What intervened was his proposal for a modest valueadded tax to help shift Japan from direct to indirect taxes. He has been savaged for this: first by the small shopkeepers who are a mainstay of the ruling party (and who prefer income tax because they avoid paying it), and then by voters in local elections. Anybody seeking to reform the food and land oligarchies will have an even rougher time. The reason is that politics in Japan is conducted by bargaining among special-interest groups — over none of which any central figure, including the Prime Minister, has much authority. Mr Nakasone, with his special commissions to evade the bureaucrats and his direct appeals to the voters, has attacked this system more forthrightly than anyone. An assault on the fanning interests, which are a powerful lobby, and on the property and construction interests, which lav-

ishly grease the palm of the biggest faction in the ruling party, will require a big gulp and a lot of courage. The man best suited to make ' such an assault is the lame duck who visited his friend Ron a couple of weeks ago. Mr Nakasone has rescued himself from other hopeless positions, so it would be foolish to write him off now. But he has never looked so weak. If he goes, all three of his possible successors look likely to return Japan to the interestbrokering ways that .Mr Nakasone was gradually eroding. Whoever leads Japan later this year, the Japanese cannot close their eyes to the choice they have to make. Twice before, in the Meiji restoration of the nineteenth century and after 1945, they dazzlingly reformed their society when they recognised the realities of the wider world. It is time they did so again. Cheaper food and cheaper land would be the way. . Copyright -r The Economist