[kitchencabinetforum] JAPAN AT CROSSROADS

Barroso decided to ask the Member States for their agreement on opening negotiations for a Free Trade Agreement with Japan. Negotiating directives will be submitted to the Council which will have to give the Commission a mandate to start negotiating. Japan is the EU's second biggest trading partner in Asia, after China, and together the EU and Japan account for more than a third of world GDP. A trade deal with Japan could boost the EU's GDP by almost one per cent and EU exports to Japan could increase by one third.

Japan's two lost decades is a lesson for Occident. Derek Scissors points out that if Japan finally made headway on its economic woes, it could provide a blueprint for others in similar situations. Unfortunately, such progress appears unlikely. Japan has struggled with political obstacles to debt reduction, as many other countries are now. There is a widespread belief, clung to despite all evidence to the contrary, that deficit spending stimulates economic growth. This must be dispelled in order for Japan or any country to take the necessary fiscal steps toward recovery. http://venitism.blogspot.com

"If growth in the next twenty years is likely to come from Asia, then overlooking Japan would be a serious mistake in our trade strategy", said EU Trade Commissioner Karel De Gucht. "Our priority in our talks will be to tackle the non-tariff barriers on the Japanese market, for example in the car sector, and to allow European business to access Japan's public procurement market. If Japan will not have removed key non-tariff barriers within one year from the start of the negotiations, we will stop the negotiations."

Scissors notes Japan's fall from economic leadership in the early 1990s was not at all due to fiscal policy. The ensuing years of stagnation and decline in comparative living standard, though, are intertwined with fiscal failure. With a shrinking labor force and limited land endowment, Japan cannot grow while the return on capital is low and innovation is weak. Yet this is exactly what to expect from an excessive state role in the economy and mass government borrowing at near-zero interest rates.

A free trade deal with Japan would boost Europe's economy by 0.8% and EU exports to Japan could increase by 32.7%, while Japanese exports to the EU would increase by 23.5%. 420,000 additional jobs in the EU are expected as a result of this agreement.

Kumi Yokoe points out structural reforms are indispensable to Japan's future, to encourage innovation, among other goals. These are critical issues deserving of extensive discussion. For the present, however, bond sales must be slashed in order to raise the return on capital. Change is daunting due to the size of the annual budget deficit and the debt.

Given the importance that the elimination of non-tariff barriers has for realising the level playing field for European businesses on the Japanese market, the negotiating directives foresee that:

* Japanese non-tariff barriers will have to be eliminated in parallel to any tariff reductions on the EU side, and that

* The European Commission should suspend negotiations if progress as specified in the non-tariff barriers and railways and urban transport roadmaps does not materialise within one year from the start of the negotiations.

Yokoe notes that eliminating the deficit is clearly more important than precisely how it is eliminated. A good place to start is the budget's special account, which overlaps with the general account but covers more spending and is a better tool for budget assessment. Given the level of debt, transfers to local governments and state intervention in the economy through subsidies are especially inappropriate. Each should be sharply reduced. Deep cuts will permit moderate reductions in pension spending to close the remaining deficit.

One response to calls for genuine budget cuts has been to invoke Japan's very brief attempt at fiscal discipline in 1997 as a cautionary tale. After 13 more years of stagnation, this is no longer sensible. Yokoe declares the government continues to inhibit growth, not support it. Some will still wonder whether now is the right time for fiscal contraction, as even necessary reform is less painful when circumstances are conducive. However, conducive circumstances have come and gone for 20 years, and little has been done. Yokoe asserts that if Japan does not act now, it risks falling further behind. http://venitism.blogspot.com