Japan must abandon harmful status quo politics. Bold tax/regulatory reform, regional hubs, and long-term reconstruction bonds can revive growth and bring back the “Black Ships.”

Peter Tasker argues that Japan’s economic stagnation stems from its preference for the “status quo.” He warns that without drastic tax and regulatory reforms, Japan will not regain international competitiveness, and the outflow of capital and talent will continue. Tasker proposes that to achieve true decentralization, a “tax competition” between regions must be allowed, and for reconstruction funding, Japan should issue long-term “reconstruction bonds.” He concludes by stating that Japan needs more “friction and imagination” to revive its economy and that the public must overcome its political apathy.

It Is Time to Change the “Status Quo” That Ruined Japan’s Economy (Part II)
From Newsweek Japan, June 8, 2011 issue
Peter Tasker, Analyst, Arcus Research

Without fundamental reforms of taxation and regulation, nothing will change. As a result, financial capital and talented people continue to flow out to Hong Kong and Singapore. Long before the nuclear accident, the “Black Ships” had already begun to disappear beyond the horizon.

To build a system resilient against an unforeseen shock like 3/11—or even worse—we must ease Tokyo’s overconcentration and develop regional cities as centers of administration and commerce. However, unless we fully embrace inter-regional “tax competition,” decentralization will remain an empty slogan.

Conversely, if financial hubs were established in Kyushu or Okinawa, equipped with high-quality transport systems and infrastructure, and combined with special tax relief, top-tier companies and talent from across Asia would surely come. The Black Ships would certainly return.

Japan has the financial capacity to achieve all this. Advocates of fiscal discipline warn that Japan could become “the next Greece,” but Japan remains the world’s largest creditor nation. Rather than dragging down growth with tax hikes, the government should ride the tailwind of historically low interest rates and issue “reconstruction bonds” with the longest possible maturities.

There are precedents. Mexico issued 100-year bonds last year. Britain went even further, issuing perpetual bonds in the early 19th century to finance the Napoleonic Wars.
It is not impossible. Japanese companies and households save enormous amounts every year—so much that even if it were used to cover all of Japan’s fiscal deficit, there would still be plenty left over.

More Friction and Imagination

Ideas for Japan’s revival are plentiful. Most of them have been debated for over a decade, but never put into action.

Ultimately, responsibility for the lack of leadership and the defects of politics lies with the public, who have chosen complacency and political apathy. A people generally gets the leaders it deserves.

If indeed this is the case now, then it is truly the end of the road.

The solidarity now being displayed by the Japanese—through supporting disaster areas and cooperating with power saving—moves the heart. But this must not be an excuse to obscure the necessary questions and necessary choices.

At present, Japan is full of harmony. Perhaps there is too much harmony. To solve the serious problems now confronting Japan, the country needs a little more friction and far more imagination than it currently possesses.

(Read together with my related essay “On Reconstruction Funding and Nuclear Power”… [link])