Monday in Washington July 23, 2018

ECONOMIC MOBILITY AROUND THE WORLD: NEW DATA AND EVIDENCE. 7/23, 9:30-11:00am. Sponsor: AEI. Speakers: Eric A. Hanushek, AEI; John McArthur, Brookings Institution; Ambar Narayan, World Bank; Scott Winship, Joint Economic Committee; Moderator: Aparna Mathur, AEI.

THE UNMAKING OF JIHADISM: THE CURRENT EFFORT TO COMBAT VIOLENT EXTREMISM. 7/23, 11:00am-Noon. Sponsor: Transnational Threats Project, CSIS. Speakers: Mitchell Silber, Principal and Co-founder, The Guardian Group; Jesse Morton, Founder and Co-director, Parallel Networks; Dr. Seth G. Jones, Harold Brown Chair, Director, Transnational Threats Project, Senior Adviser, International Security Program, CSIS.

CELEBRATING NASA'S 60TH ANNIVERSARY. 7/23, 1:00-2:30pm, Washington, DC. Sponsor: CSIS Aerospace Security Project. Speaker: Jim Bridenstine, Administrator, NASA; Sean O'Keefe, ​ Senior Advisor, CSIS, Former Administrator, NASA; Charlie Bolden, Former Administrator, NASA; Moderator: Todd Harrison, Director, CSIS Aerospace Security Project.

VERIFYING NORTH KOREAN DENUCLEARIZATION: WHERE DO WE GO FROM HERE? 7/23, 1:30-4:45pm. Sponsor: CSIS; International Crisis Group. Speakers: Andrew Schwartz, Chief Communications, Officer, CSIS; John Hamre, President and CEO, CSIS; Stephen Pomper, Program Director, United States, International Crisis Group; Rebecca Hersman, Director, Project on Nuclear Issues and Senior Adviser, International Security Program, CSIS; Richard Johnson, Senior Director, Fuel Cycle and Verification, Nuclear Threat Initiative; William Tobey, Senior Fellow, Belfer Center for Science and International Affairs, Harvard Kennedy School of Government; David Nakamura, StaffWriter, The Washington Post; Christopher Green, Senior Adviser, Korean Peninsula, International Crisis Group; General (Ret.) Walter “Skip” Sharp, Former Commander, United Nations Command/Combined Forces Command/United States Forces Korea; Sue Mi Terry, Korea Chair, CSIS.

RINI SOEMARNO, MINISTER FOR STATE-OWNED ENTERPRISES OF INDONESIA. 7/23, 4:00-5:00pm. Sponsor: CSIS. Speaker: Rini Soemarno, Minister for State-Owned Enterprises of Indonesia.

Japan's education plan to meet societal needs

On June 8th, Japan’s Ministry of Education, Culture, Sports, Science and Technology (MEXT) sent a notice to all 86 public universities in Japan (23pages), ordering departments focused on the humanities and social sciences to be re-purposed or abolished. The universities must review their “departments of teacher training and human & social science” to see if they meet "societal needs." The objective is to ensure that Japan's students are prepared for the modern, hi-tech work force and corporation.

These orders, are the result of a June 14, 2013 decision by the Abe cabinet to focus universities’ curricula on science, math, and other skills deemed to be in demand, in Japan and around the world. They also address declining enrollments in Japan’s universities as the result of the country's low birth rate. The hope is that this emphasis on STEM will create efficient and productive workers.

Many Japanese organizations have voiced their alarm at this notice. The Science Council of Japan (SCJ), a policy and outreach organization for the sciences, issued a statement, defending the targeted academic departments, which include foreign languages, law, and economics. The SCJ stated that such studies are necessary to prepare students for their careers, especially in an increasingly globalized world. The SCJ expressed its disapproval of the “short-sighted” MEXT notice and the “quick-fix answers” it demanded to complicated societal challenges that the natural sciences face as well as the social sciences.

Japan’s Keidanren, a large and powerful association of major businesses, similarly affirmed the importance of a broad, interdisciplinary education, as reported in the Asahi Shimbun. Keidanren said that, while some believe that studying hard science and receiving technical training is the best way to find work, in reality businesses need employees trained in the humanities and social sciences. It also defended the right of university leaders to set the directions of their respective institutions, without government interference.

Takamitsu Sawa, the president of Shiga University, received MEXT’s notice and responded with an opinion piece in The Japan Times. His unusually combative article likens the new directive to Japan’s policy during World War II of drafting only students of the humanities and social sciences, exempting those studying natural sciences and engineering. Sawa calls the policy "anti-intellectual" and imagines most, if not all of Japan’s public universities will become trade and vocational schools if they follow the MEXT mandate. This, he observes, was a similar objective of the 1960 Nobusuke Kishi Cabinet.

A survey by Japan's national TV network, NHK, indicated that about 80 percent of public universities intend to follow MEXT’s instructions. A similar survey by the conservative Yomiuri Shimbun found that 26 of the 60 public universities offering humanities programs will scale back or close these departments. The universities of Tokyo and Kyoto, Japan’s most prestigious institutions of higher learning, have refused to comply with the MEXT notice.

The debate over this decree will continue for some months, as schools plan to begin effecting change no sooner than April 2016, the start of the next Japanese fiscal year. Of the country’s 744 universities, about one-quarter are public and directly subject to these MEXT orders. Prime Minister Shinzo Abe believes this change will promote what he has called “more practical vocational education that better anticipates the needs of society.”

At present, the only Western press that has reported on this development has been the British Times Higher Education; Wall Street Journal, and the US National Science Foundation Here and Here.

Update, September 22, 2015
Minister Shimomura countered criticism of his Ministry's education plan on September 11 by stating that the notice serves not to categorically abolish humanities and social sciences from public university curricula, but to encourage institutions to audit their academic programs and reallocate resources based on societal demand. He cited notorious programs in education that do not require or prepare students to obtain teaching licenses before graduation as an example of ineffective programs that should be restructured or closed. What this notice will actually mean for Japan's public universities remains unclear.

American economist Noah Smith (Stony Brook University) took notice of Japan's educational changes in a September 20, 2015 opinion piece in Bloomberg View, Japan Dumbs Down Its Universities. 

He observes:

There may or may not be political reasons for the change. Japan’s humanities departments, like those in the U.S., lean heavily to the political left, and Japan’s conservative administration is in the process of reorienting security policy. More darkly, the change might be part of a wider attempt by social conservatives -- Abe’s main power bloc -- to move the country in a more illiberal direction by stifling dissent and discussion.

But the main takeaway is that Japan’s policy-making process is arbitrary and dysfunctional. According to Takuya Nakaizumi, an economics professor at Kanto Gakuin University, the changes were probably written not by Minister Shimomura himself, but by more junior members of the Ministry of Education, Culture, Sports, Science and Technology. If that is true, it means that sweeping policy changes, which will affect the entire economic and social structure of the nation, are being made by junior officials via an unaccountable and opaque process.

 And concludes:

Japan needs to keep educating students in the social sciences and humanities. It needs to avoid a doomed attempt to return to a developing-country model of growth. It needs a more robust, less arbitrary, more transparent policy-making regime. Minister Shimomura’s diktat bodes ill for all of these things.

Inflated grades on Abe's Womenomics

by Richard Katz, Editor, The Oriental Economist Report and APP member

The September 9th Financial Times rated several aspects of the third arrow of Abenomics, based on interviews with assorted experts by two of their Tokyo reporters: "The third arrow of Abenomics: A scorecard."  Here are their scores:

Agriculture A-
Energy C
Tax reform C
Womenomics B+
Corporate Governance A
Special Economic Zones B-
Immigration C-
Labor D

Giving Shinzo Abe a B+ on womenomics is outrageous, and that results suggests that we take all the other scores with large spoonfuls of salt.

Despite a series of laws—e.g.,  Labor Standards Act and the Equal Employment Opportunity Law—outlawing discrimination against women in pay, promotional opportunities and in regard to child-bearing status, firms continue to pay women less, put them on a “general” or “clerical” track with fewer opportunities for promotion and pay hikes, and engage in maternity harassment. Abe could improve the life of women by simply enforcing the law. Currently, Japan has no government agency with a mandate to investigate violations of these anti-discrimination laws and to take firms to court (the opposite of the situation with regard to financial firm violations). Victims have to hire and pay their own lawyers, spending years in litigation. Even when they win, other courts need not treat this as a precedent and firms face no fine, hence no deterrent.

Women face double-discrimination: as non-regulars and as women. 57% of women employees are non-regulars, compared to 21% of men. So, naturally, the majority of women workers get lower wages, even when doing the same job. However, even if we compare the salaries of full-time regular workers with university degrees, we find that women aged 50-54 are paid 22% less than their male colleagues.

Abe has done absolutely nothing about any of this. Abe’s one concrete effort has been a new law that urges firms with more than 300 employees to increase the share of women in management slots. Abe has said he would like women to comprise 30% of all managers in just five years—up from 11% today and far less than the 40% in the US and France. Even under the best conditions, there is no way Japanese firms can change that much in just five years. But, as with almost all of his structural reforms, Abe has once again touted a nice-sounding goal with no strategy to achieve it. The law sets no target; it merely requires large firms to set their own target. It imposes no penalties for firms that fail to meet their own goal.

And, even if it succeeded, it would help very few women. Only 30% of employees work at the large companies affected by the law. Only 14% of all employees aged 50-64 are managers. 14% of 30% equals 6%. What about the other 94%? The only way this would help is if firms with more women in management roles discriminated less against other women in regard to pay, promotion, tracking and maternity harassment. Is there any evidence on this one way or the other?

We have no reason to doubt Abe’s sincerity regarding equal opportunities for women. He has gotten Ministries to hire more women and put them on the elite career track (sogo shoku) that can lead to top positions. For example, the Ministry of Economy, Trade and Industry (METI) hired 22 women for the elite track this year, 30% of all new elite track hires. However, as with so many other economic issues, Abe is unwilling to spend political capital on difficult economic reforms when his real priority is the contentious Collective Self-Defense (CSD) bills.

In the case of pay and promotion issues, Abe dares not rankle the companies whose support he still needs. Take for example, his activities regarding part-time workers, where the law demands equal pay for equal work but the law is not enforced. Abe had a real chance this year to help those workers, and thereby increase consumer demand. He had proposed a law making it easier for firms to use workers from dispatch agencies. When the DPJ proposed an amendment requiring equal pay for equal work for those dispatched workers, the LDP watered down the provision to make it meaningless.

So, while Abe falsely brags that he has gotten firms to hike wages, when he got a chance to do something that would make a real difference, he went the opposite way. On top of that, he offered these firms a tax cut while hiking taxes on consumers, to terrible effect.

Abe has to make up his mind: if he wants economic results, he has to do what it takes to achieve them. Despite his falling approval ratings, Abe remains in the strongest position to take controversial steps of any Prime Minister in a long time. He faces no opposition within his own party and there is no opposition party with any strength. If not now, when?

>For a fuller discussion of this issue, email Richard Katz at rbkatz@orientaleconmomist.com and request a copy of the September lead of The Oriental Economist Report.

Whither Japan's economy

Monetary policy as golf

Mainly due to a severe downturn in personal consumption stemming from the April 1 consumption tax increase from 5% to 8%, Japan's GDP in April-June tumbled a real 6.8% from the previous quarter on an annualized basis.

This is  more than many had forecast including the IMF. Although a slow down of Japan's economy was expected, there remains uncertainty as to its longterm consequences. Will Japan grow again? Answers focus on Abe's "third arrow" of structural reform.

During his recent vacation Prime Minister Abe met with a number of his economic advisers both formally and over golf. It appears that maybe he may be having doubts about Japan's economic recovery expected from the Bank of Japan's quantitative and qualitative monetary easing policy introduced in April 2013. He appeared, if not for mere political expediency, listening to a number of competing opinions on the way forward.

Jackson Hole, Wyoming

On August 23, at the Jackson Hole, Wyoming, Federal Reserve of Kansas annual economic symposium among central bankers Bank of Japan (BoJ) Governor Haruhiko Kuroda focused his remarks [includes charts] on raising wages and promoting labor participation by women and elderly people. Once the BoJ succeeds in "firmly anchoring inflation expectations at 2 pct, this could provide the basis" for wage negotiations between labor and management, he said. He emphasized that increased labor participation rate of women and elderly was critical for staving off serious labor shortage due to the aging of population. Utilizing foreign workers also "deserve consideration," he added.

In an August 15th post, Structural Reforms Can Help Japan's Post-Consumption Tax Blues, on the IMF's blog iMFdirect, Stephan Danninger, a division chief in the IMF's Asia and Pacific Department, underscored the need for Japan to promote structural reforms quickly after the country's gross domestic product in April-June suffered the worst contraction in 13 quarters: "With the near-term outlook looking increasingly uncertain, the government needs to move quickly on the third arrow of structural reforms." 

This paper was a was a follow up analysis IMF's annual staff report (Article IV Consultation) on Japan issued July 31st. The IMF believes Japan’s economy will grow by about 1.6 percent this year, before slowing to 1.1 percent in 2015 as a result of fiscal adjustment. Inflation is expected to rise temporarily to 2.8 percent on average for 2014 due to recent increase in consumption tax rate, and we expect the Bank of Japan’s 2 percent target will be achieved over the medium term. The report urged Japan to steadily implement its economic growth strategy and promote fiscal consolidation.

Uninterrupted structural and fiscal reforms are "vital" to the success of Abenomics, the IMF said. Noting that "further consolidation is needed to contain large fiscal risks," the IMF urged Japan to move ahead with an additional consumption tax rate increase to 10 pct planned for October 2015 after the 3-percentage-point hike to 8 pct in April this year.

Based on the staff report, the IMF Executive Board pointed out in a statement that "significant downside risks (to the Japanese economy) remain in the medium term, including those arising from fiscal vulnerabilities." The IMF board stressed "The best way to minimize these risks is the
steadfast implementation of all the elements of the government's economic strategy,"

There appears to have been a conference accompanying the preparation of the  Consultation. Here are some of the papers presented.

Japan’s Corporate Income Tax: Facts, Issues and ReformOptions. Author/Editor: Ruud A. de Mooij; Ikuo Saito, IMF Working Paper No. 14/138.
     Explores how corporate income tax reform can help Japan increase investment and boost potential growth. Using international and Japan-specific empirical estimates of corporate tax elasticities, investment is predicted to expand by around 0.4 percent for each point of rate reduction. International consensus estimates suggest further that between 10 and 30 percent of the static revenue loss could be recovered in the long run through dynamic scoring, although Japan’s offset may be closer to the lower bound. Compensating fiscal measures are necessary in light of Japan’s tight fiscal constraints. The scope for base broadening in the corporate income tax is found to be limited and some forms of base broadening will undo positive investment effects of a rate cut. Alternative revenue sources include higher consumption and property taxes. A gradual approach toward lowering tax rates mitigates windfall gains and reduces short-run revenue costs. An incremental allowance-for-corporate-equity system could boost investment with limited fiscal costs in the short run.

Is Japan’s Population Aging Deflationary? Author/Editor: Derek Anderson ; Dennis P. J. Botman; IMF Working Paper No. 14/139.
     Japan has the most rapidly aging population in the world. This affects growth and fiscal sustainability, but the potential impact on inflation has been studied less. We use the IMF’s Global Integrated Fiscal and Monetary Model (GIMF) and find substantial deflationary pressures from aging, mainly from declining growth and falling land prices. Dissaving by the elderly makes matters worse as it leads to real exchange rate appreciation from the repatriation of foreign assets. The deflationary effects from aging are magnified by the large fiscal consolidation need. Many of these factors will beset other advanced countries as well, but we find that deflation risk from aging is not inevitable as ambitious structural reforms and an aggressive monetary policy reaction can provide the offset.

Balance Sheet Repair and Corporate Investment in Japan. Author/Editor: Joong Shik Kang; IMF Working Paper No. 14/141.
     Traces Japanese firms’ behavior over the last decades using aggregate corporate balance sheet data. Financial health of Japanese corporate sector has improved and firms paid back significant amount of debt and rebuilt their liquidity buffers. They also expanded abroad while the pace of corporate investment moderated. Regarding the latter, model estimates on aggregate corporate investment over the post bubble period show that expectation about future profitability, in particular medium-term demand outlook, has been the major driver, implying that a successful implementation of structural reforms could have positive impact even in the near term by improving the medium-term demand outlook.

Health Spending in Japan: Macro-Fiscal Implications and Reform Options.  Author/Editor: Masahiro Nozaki ; Kenichiro Kashiwase ; Ikuo Saito. IMF Working Paper No. 14/142.
     Health spending has risen rapidly in Japan. We find two-thirds of the spending increase over 1990–2011 resulted from ageing, and the rest from excess cost growth. The spending level will rise further: ageing alone will raise it by 3½ percentage points of GDP over 2010–30, and excess cost growth at the rate observed over 1990–2011 will lead to an additional increase of 2–3 percentage points of GDP. This will require a sizable increase in government transfers. Japan can introduce micro- and macro-reforms to contain health spending, and financing options should be designed to enhance equity.

Future of Asia’s Finance: How Can it Meet Challenges of Demographic Change and Infrastructure Needs? Author/Editor: Ding Ding ; Raphael W. Lam ; Shanaka J. Peiris; IMF Working Paper No. 14/126
     There is a role for Asia’s financial sector to play to address the challenges associated with the region’s changing demographics and infrastructure investment needs. Enhancing financial innovation and integration in the region could facilitate intra-regional financial flows and mobilize resources from the aging savers in industrialized Asia to finance infrastructure investment in emerging Asia. Strengthening the financial ties within the region as well as with the global financial markets alongside appropriate prudential frameworks could also help diversify sources of financing and reduce the cost of funding in emerging Asia. Finally, financial deepening could help ease the potential overheating from scaling up infrastructure investment and hence achieve a more balanced growth in the region.