However, I think we have many several serious problems to be solved as quickly as possible. Let me mention three solutions for them, especially: (1) BOJ should supply more money and (2) MOF should raise the tax rates and cut the expenditures. Moreover, (3) MOF should raise the consumption tax.
(1) Raise the demand of the economy.
In terms of GDP, employment and consumer price, Japan is seemingly recovering from the long deflationary economy. But it is still stagnant. This new year is the striking year when many retires will come into the economy. Although some of them are expected to spend money and to create new demand in the economy, many of them might cut the spendings on goods and services to remain their standard of living. If so, the whole demand shrinks and the recession comes again. Such a problem of the aging economy is inevitable. What will we do?
I would like the Bank of Japan to rather increase the supply of money to keep the economy stable. Some economists fear that inflation comes if BOJ supplies more money. But rather I am afraid that deflation comes again if BOJ supplies no more money and raises the interest rates. Inflation is a terrible economic phenomenon, which devaluates the yen and loses the credibility of the BOJ and its monetary policy. At the same time, deflation is also a horrible one, which appreciates the yen and the debt and induces them to hold money and not to spend money. We must increase the demand to avoid any deflationary phenomenon.
(2) Cut the fiscal deficit.
The path of Japan's fiscal policy is unsustainable. At present, Mr. Abe tries to cut the corporation income tax to activate the operations of company. Some fiscal economists and policymakers say that the supply side of the economy would be strengthened if the tax was cut. That is, they say that companies would enhance the production ever more if tax was levied less. I hope that the demand will, to some extent, increase due to tax cut. In this point I agree to that tax cut plan. But when tax cut is done for the purpose of increasing the corporation production, I don't agree because it is uncertain whether the tax induces companies to raise the output.*
* Theoretically, whether the corporation tax cut boosts the production depends on the elasticity of the production supply, which means how many goods and services company would increase if one unit of tax rate was decreased.
Now the production supply in Japan doesn't need increasing as I've told before in this blog. If many policymakers cut the income tax to activate the supply side of the corporation activities, they should not do that, I suggest. Now policymakers should raise the tax rate to cut the fiscal deficit first. To raise the rate, the demand will decrease. This is an adverse effect. And so, as I told earlier, BOJ should increase more money not to keep the economy down.
If tax rate is raised, more people come to think the path of the present fiscal policy less unsustainable and worry less about their future. According to the life-cycle theory, they spend more money because they are less uncertain about their future. The main reason for the present stagnant Japanese economy is their anxieties about their future living. Their worry about future makes them tighten their purses. The Ministry of Finance of Japan needs to show up the health of the fiscal balance to the Japanese people to make them loose their purses. And so it should raise the tax rate and cut the expenditure in spite of the negative effect of these policies on the economy.
(3) Fix the public pension plan.
In the longer run, the present public pension system needs fixing. This topic is closely related to the above my policy requests in terms of saving more.
In Japan the amount of saving is decreasing due to more aging people. Saving is necessary for the economy to keep its growth stable. So my third policy request is to raise the saving in Japan. Raising the saving is neither more nor less than those ones of raising the tax rate and cutting the expenditure.
For them to save more, the present public pension plan should be revised. In our present pension plan, we have to send our money to the pension fund and in several decades later we will receive the benefit. However, these days the premium on the young is going up and the benefit for the old down. It is very natural because the present plan is the system of "pay-as-you-go", which forces the young to pay for the old through the fund.
The main problem of the system is, needless to say, that the number of young people to pay is decreasing and the number of old people to receive increasing. The old people can receive neither more nor present benefit unless we the young people pay more. To keep the system sustainable, the premium should be raised and the benefit should be cut. Such a system is unattractive and unsustainable in the aging society. That's why I suggest the pension plan should be fixed earlier.
The idea of the public pension plan is very nice because we can spend the money as we get old and retired. To remain the same plan, the new tax should be levied on the whole people in Japan for the pension plan. Some economists have already been suggesting such a policy to raise the consumption tax and I agree to the tax plan for the public pension plan.
I would like MOF to raise the consumption tax rate to keep the pension plan alive. By doing so, we don't have to fear that the pension fund might collect far more premium from the younger people and cut the benefit for the old people.* To put it precisely, the consumption tax rate should be raised not for the healthy fiscal balance but for the healthy pension plan. Moreover, if the consumption tax is increased, the saving increases and the economy grows enough for us to make a good and happy life.
*However, we will have to pay more tax and have some hardship if the consumption tax revenue compensates for the pension plan.
To sum up, I would like BOJ to supply more money and MOF to raise the tax rates including the consumption tax and cut the expenditures. It is the best policy mix that we now need most.
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