"The only way to nurture growth is to have more deregulation," said Naohiro Yashiro, a professor of economics at the International Christian University, at a roundtable of chief financial officers in Tokyo yesterday. "Everything depends on structural reform and deregulation," he continued.
As he spoke he showed the gathered audience of CFOs from Japanese and multinational companies a slide presentation that said: "Regulatory reform as a key for economic recovery without stimulus."
Yashiro's views echoed concerns among the other participants about the fiscal health of Japan. The country's economy has grown little over the past decade with the events on Wall Street in 2008 knocking out a lot of the growth achieved in the latter part of the 10-year period. In response to its stagnating economy, the government has resorted to Keynesian fiscal policy over the past few years and incurred record deficits.
Masaaki Kanno, managing director and chief economist of J.P. Morgan Securities Japan, called the country's deficit its biggest "challenge".
In 2009, Japan's fiscal deficit increased by more than 160% to ¥34.2 trillion ($378 billion), according to the country's Ministry of Finance. This year things don't look much better -- the current budget includes a ¥23.7 trillion deficit.
For Japan to pay down its fiscal deficit, it needs to deregulate to encourage new domestic demand and create growth, Yashiro said. He went on to compare the productivity of Japan's agricultural and services sectors today -- 70% of national economic output -- to those of Eastern Europe under socialism in the 1980s before the fall of the Berlin Wall.
Other experts agree that Japan needs to deregulate its domestic economy. "In Japan's services industry, regulation is heavy," said Taiji Okusu, managing director and head of investment banking at Credit Suisse in Japan, in an interview earlier this week. "If you don't attack these problems, executives are not free to change the culture of their companies."
For example, regulation in Japan's commercial aviation sector and overzealous government spending on "airports to nowhere" are said to have been significant contributing factors to Japan Airlines' bankruptcy filing in January .
Interestingly, the only party that does not seem overwhelmingly concerned is the Bank of Japan. Miyako Suda, a member of the policy board at the central bank, agreed at the roundtable that Japan faces significant economic pressures but took a far less pessimistic view.
"Fundamentally, I can say that there are a great number of uncertainties both on the upside and the downside [facing Japan] but they balance each other out," she said at yesterday's roundtable. Risks Suda cited included the high growth of commodity prices, fluctuating inflation expectations and the US making adjustments to its balance sheet.
Despite the central bank's reticence, which isn't surprising in a country that abhors sudden change, the consensus view was that fiscal pump priming is no longer working in Japan and that a new economy-boosting tactic is needed. Whether that tactic ends up being deregulation remains to be seen.