The Japanese government sent a significant signal to the world yesterday by its decision to cut personal income tax levels. It follows widespread fears that the austerity and deregulation policies pursued by the prime minister, Mr Hashimoto, would drive the economy into recession after the recent Asian financial crises. This reverses his policy line, but within the wider and deeper context of a possible threat to the economic system as a whole, not only in Japan but throughout Asia and the other parts of the developed world.
It was Keynes who observed: "When the facts change, I change my mind. What do you do, Sir?" He would have appreciated Mr Hashimoto's resort to a fiscal stimulus when confronted with a possible debt deflation at home and in the Asian region as a whole. It will result in a further deterioration of the public finances in the short term. Gross government debt as a percentage of GDP is reckoned at about 100 per cent. But this will be an acceptable price to pay if it restores confidence, shores up shaky bank finances and boosts domestic consumer spending. It should also take some of the pressure off cheaper Japanese exports by raising the value of the yen. The decision has predictably pleased the US government, which has been encouraging Mr Hashimoto to take just such a measure. The only reservation about it is whether the estimated $15.7 billion tax cut is sufficient to do the job. It will be interesting to see how Mr Hashimoto weathers the criticism that he has become once more the creature of old pump-priming party bosses and abandoned his ambitious plans for structural reform.
The prime minister had just returned from a meeting of ASEAN leaders who urged him to come to their aid after the wrenching currency and market turmoil they have been through. He resisted their pleas for unilateral Japanese action, saying help must be channelled through the International Monetary Fund (IMF) according to the severe medicine it has prescribed. It would also be interesting to hear Keynes's opinion on these IMF orthodoxies. A range of critics, including luminaries such as Jeffrey Sachs of the Harvard Institute for International Development, has said they are in many respects inappropriate in the specific circumstances of the Asian Tiger economies. They have combined growth with relative social cohesion and equality through high welfare and educational spending, however flawed have been their levels of indebtedness, financial systems and intrusive state capitalism.
It may well be time for economies as developed as South Korea to open up more competition and to restructure. But it is questionable whether the orthodox structural adjustment policies imposed by the IMF are really suited for such a sophisticated economy. They will throw many hundreds of thousands of people out of work in the name of recasting an over-indebted financial system and a tightly controlled set of corporate conglomerates. Social welfare and cohesion policies, and the educational achievements that have under-written South Korea's progress, will also suffer. Not surprisingly, such issues will be to the fore today as South Koreans vote for a new president. In these circumstances, Japan has regional as well as domestic responsibilities.