The Reconstruction Design Council (RDC), charged by Prime Minister Naoto Kan with drawing up a detailed reconstruction plan for Japan’s devastated northeast, has swung into action. The Council represents the twenties, by my count, of a string of official councils and conferences set up by the government since the deadly earthquake and tsunami of March 11.

　　　The creation of the council was announced on April 11 -€ the day after Kan’s Democratic Party of Japan (DPJ) suffered a crushing defeat in the first phase of the 11^th unified regional elections -€ a delicate timing that makes one suspect an attempt by the DPJ leadership to somehow erase the negative impression of the defeat. In the elections conducted under the leadership of the DPJ administration, the party failed miserably to secure all three gubernatorial posts in Tokyo, Hokkaido, and Mie Prefecture -€ each constituting a crucial constituency, respectively, for Prime Minister Kan, his predecessor Yukio Hatoyama, and the incumbent DPJ secretary general Katsuya Okada. Told by a member of the opposition Liberal Democratic Party (LDP) during deliberations at the upper house budgetary committee on April 18 that he might as well consider stepping down because of his alleged lack of enlightened leadership, Kan replied:

　　　“I must concentrate all my efforts on recovery and reconstruction. I am hoping to fulfill my historical mission of drawing up a blue print for reconstruction, including, if possible, Japan’s financial restructuring, with the government and opposition parties joining hands. Nothing would satisfy me more.”

　　　Such an objective may be quite satisfactory for Prime Minister Kan himself. In fact, however, what sort of recovery and reconstruction does he have in mind? Does this man, who desires to continue to serve as the nation’s top political leader, realize that his vision may not necessarily be satisfactory for Japan and the majority of the Japanese people at this juncture?

　　　RDC’s first session was held on April 14. Its chairman, Makoto Iokibe who serves as president of the National Defense Academy of Japan, abruptly proposed a new tax for reconstruction during the news conference following the session. The tax, construed as having been proposed by the chairman as a fait accompli, created controversy and will be taken up by an individual sectional meeting of the council at a later date. One cannot but think that the chairman’s abrupt and yet concrete reference to a reconstruction tax, following immediately the council’s first session, obviously reflects the strong wishes of Prime Minister Kan to see the tax enacted.

　　　Tax increase is an idea also shared by party secretary general Okada, who supports Kan. As a matter of fact, Okada has already referred to the need for issuing recovery/reconstruction bonds to secure parts of the funds, estimated at a total of 25 trillion yen (some $300 billion). Okada apparently is of the opinion that these expenditures will not be able to be covered by merely reviewing the existing annual government budget. According to government sources, the timing and scope of a tax increase will also be debated among experts in due time, but these sources insist that the only way to redeem reconstruction bonds is through taxes.

　　　Hope for the rehabilitation of Japan’s northeast, as well as the rest of the country, is commonly shared by all of the people residing in this archipelago. The entire nation can be counted on to get involved in the vital task of reconstruction. However, I dare ask if a tax hike is really the right answer. Rehabilitation of Japan -€ or any country for that matter -€ will be possible only when powerful economic growth becomes a reality, with the private sector playing the central role. The economy of each of the affected regions in northeast Japan is in a shambles today, with their neighboring areas hopelessly hard pressed. Still there are numerous business people across the affected regions who are courageously trying to bounce back under extremely dire circumstances. What are they thinking now? What do they have to say?

“We Want the State to Think and Act on Our Behalf.”

　　　Hirofumi Fujinuma, who runs Asahi Engineering Co. (74 employees) in Hanamaki City, Iwate Prefecture, brushed aside the proposal for a tax hike rapidly gaining strength among top government leaders as “a shallow idea entertained by those who know nothing about how the real economy works.”

　　　Fujinuma was just about ready to deliver a piece of machinery worth 130 million yen ($1.6 million) to Kikuchi Giken Co., located at Ofunato on the Sanriku shoreline in Iwate Prefecture -€ one of the hardest hit areas by the March 11 earthquake and tsunami. The machine is designed to bake oyster shells at high temperatures to produce powdered calcium. Product from Fujinuma’s machine can be used as a food additive, or may be mixed in plaster to add to its whiteness when used on walls. But Fujinuma now has nobody to deliver the completed machine to as Kikuchi Giken, one of his prized clients, was hopelessly devastated by the tsunami.

　　　Besides manufacturing such machines, Asahi Engineering Co. has also long been a subcontractor for Kanto Automobile Co., a 100 percent subsidiary of Toyota Motors Co., and was making Corolla parts.

　　　“But the supply of IC chips has stopped altogether so we cannot make car parts, although we want to, very badly,” explains Fujinuma. “We have electricity alright, so we are ideally situated to make any amount required so long as the materials are available. And yet, we can’t make them because of the absence of the materials, and no orders have been received since March 11. If we continue to have to lie low in this fashion for too long, I am afraid we will be running the risk of seeing our business taken away by foreign companies.”

　　　In addition to his inability to engage in production of parts, Fujinuma says his firm’s financing has reached a critical stage, noting:

　　　“Last year, when Toyota’s reputation took a severe hit in the United States and the company was forced to shrink production, all work stopped at small and medium-sized corporations like ours. So we took an emergency loan from our bank to keep our heads above water, and we had just about started repaying our debts when the big quake and tsunami hit us.”

　　　As chairman of the Hanamaki City Industrial Club, Fujinuma negotiated with Mayor Mitsuo Oishi, who noted:“Local enterprises in Hanamaki have seen a drastic decline in the number of clients since March 11, and, if the current situation continues, they are running a great risk of facing business failures before long. While it definitely is the responsibility of individual enterprises to develop new clients and regain sales, as mayor of this city I do not wish to invite a situation which causes their collapse under such conditions of extreme difficulties. While banks can resort to a system of having public money poured into them, private enterprises do not have such a luxury. However, if private enterprises fail, that will mean less jobs for local citizens and lead to a decline of the regional economy, which in turn causes the GDP of the whole of Japan to dwindle. That’s like killing the goose that lays the golden eggs. So, I have made a decision to have the Hanamaki City assembly look into the wisdom of the city covering the interests on emergency loans on behalf of private enterprises in our city in an effort to help lessen their financial burden somewhat.”

　　　When an enterprise asks a bank for an emergency loan, guarantee by a warranty association becomes mandatory, making the interest rate between 0.5% and 1% higher than an ordinary loan. What Hanamaki City is trying to implement is a system to make up for the interests on the emergency bank loans, including the added interest rate charged by the warranty association, so private enterprises can effectively draw bank loans in case of emergency without having to be burdened by interests.

　　　“Essentially, I would like the state to think in such realistic terms first and foremost,” continued Oishi. “Of course, the state has a system under which it offers a variety of loans, but every one of them is hard to apply for, largely because the interest rates are high. Hanamaki’s economy could really go down the drain unless the city comes forward to do something about it, which calls for us to take the first step forward. I am fully aware that countermeasures like making up for the interests cannot truly be effective unless they are carried out on such a grand scale as to involve practically all the businesses in our city. Therefore, we are currently looking into what the extent of our projected assistance will be. I really want the state to offer us a helping hand that would be truly useful to a regional city like ours -€ especially at such a critical time of need.”

Needed: Composure Especially at Such Chaotic Times

　　　Mayor Oishi wondered aloud about the wisdom of the proposed tax hike steadily gaining support among the top echelon of the DPJ administration, pointing out:

　　　“I personally am of the opinion, too, that discussing plans to rehabilitate Japan’s northeast, as well as the rest of the country, without securing solid financial resources would be irresponsible as well as counterproductive. However, we should remember that even before the March 11 disaster, we knewﾂ黴€ tax increases would lead to a serious cooling down of the nation’s business. I would strongly urge top government leaders to scrutinize what grossly negative effects tax hikes would have on the economy, regional and national, now that the earthquake has wreaked havoc of such magnitude.”

　　　On the heels of the Hanshin-Awaji Great Earthquake of 1995 -€ a magnitude 6.8 earthquake which killed nearly 6,500 people -€ the private sector as well as the government promoted active investment in order to rebuild and rehabilitate Hyogo Prefecture in western Japan and Awaji Island in the inland sea. As a result, Japan’s GDP did not suffer a decline, and the Japanese economy began showing solid signs of recovery. This time, too, every effort should be made to prevent the overall economy from cooling off. For that purpose, enterprises across the archipelago, especially those in the affected regions, must be helped at all costs until they get back on their feet again. In this light, levying a reconstruction tax under such circumstances is a blatant case of putting the cart before the horse. The Federation of Economic Organizations (Keidanren), the powerful economic advisory body to the prime minister, has somehow agreed to an introduction of the projected reconstruction tax while forgoing a previously proposed reduction in the corporate tax.

　　　However, it is vital -€ particularly in such chaotic times as these -€ that we exercise composure and come to grips with the truth of the matter. Can Keidanren responsibly maintain that a vigorous economy can be built by taking on additional tax burdens on top of the current corporate tax rate, which is among the highest in the world? A sudden surge in the value of the yen occurred right after the disaster as it was speculated that Japanese corporations would be repatriating overseas funds to cover expected losses and recovery costs. Although the surge has provisionally been stopped thanks to a joint intervention by the Group of 7 industrialized nations, it could happen again should the market move beyond Japanese government intentions. A rising yen inevitably invites the danger of shrinking Japanese exports, which are the key component to sustaining the Japanese economy.

　　　It would seem more important for Keidanren, which sees itself as a driving force behind the Japanese economy, to first and foremost get back to the basics of assisting private corporations in their development, thereby driving growth and generating more cash in the domestic market, powerfully sustaining the country’s economy. In that vein, now is the time for this powerful economic lobby to make an appeal to the country’s politicians regarding the changes badly needed in Japan’s taxation system and economic structure. Keidanren should, for instance, be talking to Prime Minister Kan about his concrete plans for Japan’s participation in the Trans-Pacific Partnership. It would seem natural for Japan to aggressively seek to take part in the process of formulating TPP’s basic system so it can also develop a framework of agriculture that is internationally competitive.

　　　When one starts with the fundamental premise that the economy must be strengthened to make Japan’s recovery and rehabilitation a reality, nothing truly is as contrary to reason as a tax hike under the current circumstances.

(end)

(Translated from “Renaissance Japan” column no. 458 in the April 28, 2011 issue of The Weekly Shincho.)