The Economics of Asia

Thursday, October 29, 2015
Adam Posen

President, Peterson Institute for International Economics

Takatoshi Ito

Professor of International and Public Affairs and Associate Director of Research, Center on Japanese Economy and Business, Columbia Business School

Paul Sheard

Chief Global Economist, Head of Global Economics and Research, Standard & Poor's

Introductory Speakers

Senior Fellow for Japan Studies, Council on Foreign Relations

Experts discuss the economics of Asia in the context of the U.S.-Japan relationship.

This symposium is held in collaboration with CFR’s Japan Studies program.

SMITH: Good morning, everyone. Welcome. My name is Sheila Smith and I’m the senior fellow here at the Council on Foreign Relations for Japan studies. I am delighted to be here today. We’re going to have a fabulous conversation about the U.S.-Japan relationship, but we’re also going to situate that relationship in the broader issues of how to manage the global economy and how to manage the very rapidly transforming Asia-Pacific.

Our gathering here today at the Council is a shared initiative. We have had the pleasure of welcoming Yoichi Funabashi of the Japan—the Rebuild Japan Initiative Foundation, and he has brought with us a very high-powered team of Japanese experts. But we have worked very closely with Yoichi over the years. Dr. Richard Haass, our president, led a delegation of CFR members to Tokyo this February, and Dr. Funabashi and his institute hosted a very, very rich discussion with his members as well as a larger, broader audience of Japanese business and intellectual elites. So we’re very grateful to Yoichi for all that he does for the Council and for the Japan program specifically.

I wanted to say just a few words. I’m just back from Beijing and Tokyo. It is a moment in the region, I think, that is not only sensitive to the changes afoot in the Asia-Pacific, but I think it’s a moment too where the U.S.-Japan partnership needs a lot of attention, a lot of discussion and a lot of—really a deep dive into the way we see the world and the way we see the Asia-Pacific, in particular. We have very deep common interests together. We don’t need to reiterate them here. As I look out in the audience, I see lots of expertise, so I won’t make the case for the U.S.-Japan partnership; it makes the case for itself.

But I do think the world is changing quickly, and I think sometimes the perceptions in Tokyo and the perceptions in Washington are—we’re looking at the same thing but we’re not always seeing it in the same way. And it’s opportunities like this, with experts like Dr. Funabashi and his colleagues, that help us deepen a little bit our appreciation for the way those perspectives differ.

That being said, I think in the end you’ll find, and I think we’ll find in both our conversation on the economy and our conversation on the rise of China, that you’ll see that we have a lot of commonality in where we would like to see both the region and the world head. So I’m very excited about this.

Let me also just invite Dr. Funabashi up to the stage for a few moments. Yoichi and I have known each other not as long as Dr. Haass and Dr. Funabashi have, but it feels like almost as long. He has done, I think, what very few people in Japan have ever been capable of doing, and that is he has led the conversation from outside of government on Japan’s foreign policy and strategy, he has served as a member of Asahi Shimbun in Beijing and in Washington, he knows both China and the United States well, and he has never hesitates to let us know what he thinks about our relationship but as well as his views on the region.

But he has also lately built this new think tank, the Rebuild Japan Initiative. He came out after the triple disasters in 2011 and put together an incredible array of support for this initiative. And I think it is Japan’s only independent think tank. It’s led—so he leads intellectually, but he also leads in terms of institution-building in Japan, and we are always privileged to be his partner.

Yoichi, welcome. (Applause.)

FUNABASHI: Well, Sheila, thank you very much for your kind introduction. It’s great to see so many familiar faces. We are very much honored and humbled that you have taken time to join us for this critical discussion.

RJIF actually has been very much grateful for giving me—us—this opportunity. We have known that the Council on Foreign Relations does not often jointly have a discussion session with another think tank, so I am extremely honored to share this stage with the Council on Foreign Relations.

I also am very much delighted there are two really heavy heavyweights, Adam Posen and Shiraishi Takashi, both of them being the authors to the publication which Sheila just mentioned. We published reports titled “Examining Japan’s Lost Decades” in April, in both English and Japanese, and Sheila has been a member of this Examining Japan’s Lost Decade project from the start, and she also is a leading author to the publication. We actually began a series of events featuring this theme and its relevance to the world, Japan’s lost decades, in May, first at Harvard University and then at Chatham House, then at the Australian National University. So this is the last leg for us to advocate our findings.

Our think tank was established in the wake of Fukushima Daiichi nuclear disaster. We actually set up a team of six members of independent investigation commissions and 30-some researchers made up of scientists, engineers, lawyers, journalists, consultants and former government officials and others to provide investigation into the causes and response of the crisis.

The crisis itself was really the most severe national crisis, almost existential crisis, in Japan’s postwar history. It identified the underlying fundamental causes of that crisis, such as failings of crisis management, governance and leadership. This Examining Japan’s Lost Decades in a way was a sequence of this ongoing study. Our institute, think tank stands out in Japan as three—there are three pillars: one, critical review; two, independence; and third, global outlook. So as we attempt to develop our think tank into a really global, a leading global player, the Council on Foreign Relations continues to provide us inspiration and a sort of first-class model. So it is, once again, a great honor for us to share this stage with the Council on Foreign Relations. And thank you very much. (Applause.)

SMITH: With that, let me give you a very brief introduction of what we’re going to do today, and then I’ll turn the floor over to our first panel.

We will talk about two very particular issues. The first, of course, is going to focus on the state of the global economy, our national economic strategies and the challenges we face ahead. The second panel will focus on our relations with a rising China and the geostrategic changes afoot in the Asia-Pacific. And then finally, our last session is going to be a conversation between Dr. Funabashi and Dr. Haass on the agenda for cooperation between the United States and Japan.

You have the bios of all the participants in your handout, so we will not spend much time as presiders introducing people. We will go right into the conversation. So Paul, thank you very much for your patience. The floor is yours. Thank you.

SHEARD: Thank you very much, and welcome, everybody, to today’s Council on Foreign Relations initial panel here on the economics of Asia. My name is Paul Sheard. I’m the chief economist for Standard & Poor’s, based here in New York. I’d also like to welcome the people that are on the livestream, as well.

So let me introduce the two panelists. As Sheila said, we’ve got the bios; this can be very brief, and I think both panelists are very well-known to the audience here.

Takatoshi Ito is the professor of international and public affairs at Columbia University, the business school at Columbia University, and also the associate research director at the Center on Japanese Economy and Business. As you know, he’s a very well-known economist both on Japan and Asian economies and has been over the years a very prominent voice influencing economic policy in Japan.

Adam Posen is the president of the Peterson Institute for International Economics in Washington, D.C. And Adam also is an extremely prominent international economist and has deep expertise on Japan as well as the Asian region.

So I’m going to take the liberty of interpreting the economics of Asia, which is the topic here, as to more the economics of Japan and its place in Asia, particularly with respect to China, so we can focus the discussion a little bit more.

So let me start the conversation by first of all asking you, Taka, about your evaluation of so-called Abenomics. It’s now coming up to the three-year mark since Prime Minister Shinzo Abe came back into the political limelight as the leader of the LDP and then, of course, regaining the prime ministership in December 2012. And Prime Minister Abe really took the—seized the imagination, I think, of the world with his vision and energy and his communication of this Abenomics strategy, metaphorically the so-called Three Arrows.

And just to remind the audience, the three arrows, of course, the first one being a very bold and aggressive monetary policy, which he had to implement through the bank of Japan, but of course he had the opportunity—Prime Minister Abe had the opportunity to appoint a new governor at the Bank of Japan; and the second arrow being flexible fiscal policy aimed at supporting the economic recovery; and the third one, of course, is the so-called growth strategy, really aimed more at the real economy, raising real growth through structural reforms and various policies to promote innovation.

So here we are, almost at the three-year mark, Taka. What’s your evaluation of it, and particularly, looking forward, how do you see the Abenomics agenda playing out over the next one to two to three years?

ITO: Thank you, Paul.

As I see it, those three arrows I think have different achievements or different speed of trajectory to the mark. And the first arrow is aggressive monetary policy to get the deflation—economy under deflation up to normal inflationary environment. And this is very important for stimulating the economy and the investment and get the fiscal situation better.

And I would say, you know, this is almost achieved, right? So, clearly it’s not deflation anymore, and CPI, the inflation measure—there are similar measures, so we have to be careful, but underlying inflationary trend is already in 1 percent range. The measured inflation rate you hear headlined is around zero because of the oil price decline, but this is temporary, I think, a temporary thing; that so as price decline effects expires after 12 months, that it will go back to this underlying trend, which is around 1 percent and rising. So I’m optimistic about this getting out of the deflation, which I would say is already achieved, and going to the 2 percent target, which Mr. Kuroda, our governor, clearly outlined.

Second arrow, flexible fiscal policy, is a little bit tricky, right? Flexible means that when needed, countercyclical, temporary short-term stimulus will be applied, which we did in 2013, and 2014 slightly less, and this year slightly less, and that all came with supplemental pressure again now, but I imagine that won’t be a large stimulus. But in the medium run, everybody agrees in Japan that fiscal situation, the huge debt, is already too much and we need to get back on the path of the fiscal consolidation.

And the first step was the consumption tax—which is a VAT—tax rate hike in April last year, and which Prime Minister Abe did. And the second step is now delayed but is scheduled in April 2017, and once this is completed, which Mr. Abe is saying that he will do it unless Lehman Brothers kind of crisis happens again, the VAT rates will be 10 percent. And this will be on the path of consolidation, avoiding the fiscal crisis. So if ABE is careful to use this short-term countercyclical stimulus with intermediate, medium-term consolidation, I’m also optimistic.

Where I’m not optimistic, or cautiously optimistic, is the third arrow, which is the growth strategy. We have seen the growth strategy documents three times already—2013, 2014, 2015. Every year in June it comes out, these documents. And it’s getting fatter and fatter with more items on the menu, but we haven’t seen the dramatic implementations in these 200-some items.

And what we need is no more documents, just implement a few of those or several of those and make impacts, impression on the economy. You know, those are the good ideas. And actually, I was on the Prime Minister’s Council of Economic Policy, Economic and Fiscal Policy, in 2006, when Mr. Abe was first time prime minister, and actually we crafted all those things, FTA and agricultural reform and so on, and we were about to implement, and he quit. So when he came back and the third arrow was announced, oh, these are familiar, these are recreated, 2006. So I take some credit, and they are good ideas. Just implementation is a problem. So third arrow is still far away from the mark; we need to travel faster.

SHEARD: And I don’t know who invented the metaphor, but the third arrow, as you know, has been called a thousand pinpricks or a thousand needles—(laughter)—which, you know, you can interpret two ways: they’re just pinpricks, or you could actually interpret to say there’s a lot of them so maybe they do add up to something.

But Adam, let me ask you a very similar question, a long-time observer of Japan, been involved in the policy debate. What’s your overall evaluation of Abenomics to date, and more importantly, where you think this is all going?

POSEN: Well, thank you, Paul. Before I respond, just I want to say again thanks, Richard and the Council, for doing this, especially to Sheila for continuing to fly the flag of the importance of Japan and U.S.-Japan relations, which is critical.

And I also want to express my admiration for Yoichi Funabashi and the Rebuild Japan Initiative Foundation because I run a think tank, too, but I’m on a think tank that already existed. He built something in an environment where there’s a lot of hostility and a lot of suspicion for independent thinking, and RJIF stood up after the triple disaster and really called Japanese governance into question in a substantive way. And I admire what you’ve done, so thank you very much.

And in that spirit of niceness, I will actually be more optimistic on Abenomics and my assessment in the future than Taka’s been. I basically agree with him on the monetary arrow that they have gotten out of absolute deflation and things are going to continue to get better. I disagree with him some on the fiscal arrow. I think the performance so far is worse than it should be, but we can talk about that.

But the biggest point of disagreement is I’m actually quite positive on the structural reforms. You know, anybody who’s been working on Japan—and I’m actually a relative newbie compared to some of the people who’ve spent decades on U.S.-Japan relations—is used to the idea that the U.S. keeps coming up with these lists; the Japanese government and academics, like Taka, come up with these lists; there’s always 10 million things to reform, and nothing ever gets done. Well, I think that’s unfair to what’s happened so far, and I just want to feature three reforms that I think are truly substantive.

First and most important is “womenomics.” There are 700,000 women working in Japan now who weren’t working as part of the workforce three years ago. That’s in a workforce of around 52 million. That is a huge number. That is enough to offset demographic decline for five or six years. Now, some of those women are part-time, but we know from the Nordic countries that’s part of how you keep women in the workforce, is you allow for flexible arrangements. They’re certainly still discriminated against and paid less. That has been part of the problem with getting wages up in Japan, is because you have this influx of new workers, increasing supply, lesser paid. So as a transitional matter, it’s actually worked against the reflation policy. But that, again, isn’t unusual. We saw in Germany they did huge labor market reforms 15, 20 years ago under Chancellor Schroeder; it took three or four years, until the next recovery, before you started to feel the benefits, because while you do the reforms, they’re a drag on the economy. And that’s what’s happening in Japan. “Womenomics” is real. It’s not getting rid of sexism, but it’s a huge step forward.

Second, corporate reform. It’s not perfect, but some of the reason stocks are up in Japan isn’t just a weak yen and luck; it’s that you actually are unlocking value in some of the big companies. We’ve seen the pressure on Toshiba, Olympus and others in ways that didn’t exist before. Again, I’m not going to tell you this is a perfect stock market. Of course, the stock market here isn’t exactly perfect either. All these bound-up, complicated companies where you couldn’t really tell what was going on, the value is to some degree being unlocked, and that’s part of the reason foreign investors are in.

Third, agricultural reform. Now, we all know in the U.S. we have the obscenity of growing almonds and rice in California and growing sugar here instead of importing it, so every country’s got its agricultural foibles. But in Japan, everything was truly upside down, and Taka did some of the huge work on it documenting how bad this has been for Japan.

And in the context of TPP, but also domestically—TPP, the Trans-Pacific Partnership Deal—there’s huge agriculture reform underway in Japan. JA, the semi-communist, semi-NRA collective that runs Japanese agriculture—(laughter)—is being disassembled at the moment and we’re not having to wait for all their 80-year-olds to die to disassemble them. If TPP goes through, there’s going to be a huge change in Japanese agriculture. On my back-of-the-envelope calculations, if this goes through the way it should—and whether or not it goes through is something we’ll come to in a minute—it’s going to save a thousand dollars-plus per year for Japanese households in terms of reduced cost of food. That’s a big number and it’s huge symbolically. So I don’t think we should be as skeptical.

I’ll just—let me make one final point, Paul; I’m sorry. You know, we go around, we look at Europe and we always have the laundry list: Greece should do the following 20,000 things, Italy should do the following 20,000 things; Spain actually does five out of the 20,000 things. Japan, yeah, we’ve all been complaining for years, but there is real progress being made. And it’s not a question of glass half-full, glass-empty. It’s a question of these are things that will meaningfully raise the growth rate, which is the goal. And I think we should acknowledge that.

SHEARD: Thank you very much, Adam, a very useful perspective there, particularly on the so-called growth rate, your third arrow.

I want to come back to where we sort of started with the monetary and the fiscal, and I guess I’m a little bit more wary than both of the panelists here, I think, on has Japan decisively exited this secular period of deflation. I mean, you look at the index numbers, the GDP deflator now, you know, is in part-positive territory, that is helped a little bit by rising—falling oil prices, just arithmetically, through the GDP relationships, which tends to help the deflator. And CPI, I think the one that I would look at is the so-called core CPI, which nets out food and energy, and that’s 0.8, and that has been trending up.

So I think that this really miraculous shift in policy at the Bank of Japan, you know, has had a dramatic effect and it’s moving in the right direction, although I would have to say the markets are looking for more. Even though what the Bank of Japan is doing is pretty big, pretty stupendous, the markets always want more, and of course it’s open-ended, so even if Mr. Kuroda does nothing, the balance sheet still expands. I think that point is sometimes lost on people.

But maybe more on the fiscal side, if you look at the Japanese economy, last year it did go into recession, a technical recession, you might call it. You know, I think everybody thought this year would sort of pick up quite nicely again, and we had a negative quarter in the second quarter, and a lot of people are saying, you know, the third quarter could be slightly negative as well. We’ll get that data soon.

But looking back on that consumption tax hike of last year, which—you know, there was a big debate running up to that, and you were both involved in it, I was involved in it, and there were sort of two sides there. But some people were saying, look, it’s OK, it’s not going to have much of an effect on the economy, let’s go ahead. Others were saying, look, let’s nail ending deflation first, first things first, and then proceed with fiscal consolidation.

But a two-part question, again back to you, Taka. Looking back, do you think that was a policy error? Or, knowing what you know today, do you think that that was the right policy decision? And then looking forward to April 2017, do you think that that should be made contingent on economic conditions or whether it should be kept on a kind of autopilot, as Mr. Abe has done at the moment?

ITO: So it was not a mistake, and it should have been raised and he did. And yes, the downturn was more than I expected, everybody expected. So there is something about consumption not coming up, but this may be due to the consumption tax increase, perceptions of it or something else, and we don’t know. We can’t run that experiment. But waiting till, you know, growth rate comes to 2 percent and inflation rate 2 percent and old-normal situation, it may not come, so we need to have this medium-term trend consolidation. If it goes down a little bit, you can do the stimulus, short-term stimulus, to back it up, the consumption going down, by, you know, government expenditure, which the government did.

So we should keep this medium-term consolidation to avoid future fiscal crisis out there. And if there is a cyclical thing, we apply the cyclical—countercyclical fiscal stimulus, 2017 we should do it.

SHEARD: Adam, you’ve done a little work on Japan’s fiscal situation.

POSEN: Yeah.

SHEARD: You know, the numbers, when you throw the headline numbers out there, you know, government debt on a gross level to GDP, I think, is around 240 percent, that sounds like an astronomic number. You know, the fiscal situation is improving, but Japan is still running budget deficit. So that continues to, almost by definition, move up. The net debt situation, which I suspect economists like yourself would focus in on, is much better. I think it’s probably around 130 percent or so, depending on the calculation, but still, much higher than other countries.

What’s your view on Japan’s sort of fiscal outlook? Is Japan kind of—is a fiscal crisis, so to speak, almost baked in at some point, or is there some kind of exit strategy for Japan from this fiscal situation?

POSEN: I think, Paul, what I’ve been saying, and along with Taka, I don’t think the surprisingly bad results of the consumption tax hike really change anything. I mean, it’s a sad reality, but it doesn’t change the underlying facts. I think Japan is on a path not of a fiscal crisis the way, say, a Greece or an Argentina is, because they don’t have foreign debt and they don’t have foreign-denominated debt, but they are on a path where they’re going to be forced to make a lot of domestic adjustments, a lot of quick cuts in things they don’t want to cut, if they’re not careful, because even at—I agree with you—net debt-to-GDP of 130 percent, that means if interest rates go up even a little bit above 1 percent, then very quickly, interest payments balloon to become a huge part of the debt—of the budget. And if inflation works, interest rates have to go above 1 percent.

So, you know, it’s not that they’ll run out of money in the literal sense, it’s that they’re going to be having to pay all these interest bills and they’re going to have to cut something else, and you don’t want to do that. So I agree with Taka. The share of taxes in the Japanese economy is actually very low, partly because of bad collection, partly because just politically it’s never been put up very much, so there’s a lot of room for them to have a significantly higher share of the economy going to taxes. I mean, they’re much lower than even the U.S., certainly compared to Europe or other Asian economies.

So the question is, how can we get on this path? And, you know, here I’m going to be the unrealistic economist, in a sense. If you really want to do this right—Taka has done one set, the OECD has done another set, the IMF, Nateera Foukow (ph)—various people have done calculations. If you’re going to avoid having large cuts in benefits and things, you need to get the value-added tax and consumption tax up somewhere above 20 percent in the long term. Some people say it needs to be 25, 22 (percent). I mean, let’s not get it—but you have to get it at least up above 20 percent. And if you need to get from 8 to 20 (percent), it would be better to do it a little bit at a time for a long time.

And so when we have the situation in Japan where every couple years it jumps up by a large amount, you’re shocking the economy. So you mentioned earlier, I think it was, the term “autopilot.” In an ideal world, it would be like indexing. They would just sort of say, well, every year—you know, it’s just on a continuous basis; every six months, up 0.5 (percent), up 0.5 (percent), up 0.5 (percent), irrespective of who was in government. And that would also have an inflationary benefit because we’d convince people prices are going to go up.

Now, for political reasons, that seems to be unrealistic, but it just tells you that every time they put it off, they’re more likely to have to do a bigger jump in fewer scales, which is worse.

ITO: Yeah, I agree too much. I think you should speak up and—

POSEN: Yeah, you should tell us why we’re—(laughter)—you should tell us why we’re wrong. But Taka and I are in agreement, for the most part. (Laughter.)

SHEARD: All right. Well, I’m going to leave that to my sovereign debt colleagues at Standard & Poor’s. But I do want to—and, you know, I think the answer really is—it’s—nobody really knows how all of this is going to play out. I mean, personally, yeah, I think we’re seeing with the QQE of the Bank of Japan, you know, what could happen in the future. I mean, I think the idea that Japan is going to, again, run out of money—

ITO: Right.

SHEARD: —in that sense looks slightly implausible, because for that to happen, the part of the government that has the electronic printing press that create yen with the tap of a keystroke—that is, the Bank of Japan—would have to say I’m not going to press that keystroke.

ITO: Right.

SHEARD: And, you know, I think that’s somewhat implausible. But, of course, we know from history and other—and from even analytics that that doesn’t solve the problem necessarily. Maybe you need—maybe you end up with inflation. So we may be sitting here in 20, 30 years’ time talking about Japan’s uncontrollable inflation. And we will look back and say in my youth we used to talk about Japan’s deflation.

POSEN: Just to flag that, because you mentioned the monetary. And I don’t want to delay us getting to the audience, but just two quick points for you guys to comment on.

First is I think one thing where I’ve certainly had to change my views, and I think people in general are starting to have to change their views, is literal deflation isn’t quite as bad as we thought it was. If you—I hate to go all the way to the BIS, where they like deflation—I’m not there—but that if you look back at per capita GDP growth the last 10, 15 years since the Koizumi government in 2002, actually it’s pretty good in Japan. And so the deflation didn’t spiral downward, didn’t have as much bad effect as we thought. It probably hurt, but, you know—so I wouldn’t get too caught up in that.

But the second thing is the challenge when you talk about, you know, monetary policy—and again, you guys come in on this—but I think the challenge from the BOJ—the BOJ has actually had more traction in some sense with its policy the last couple of years than the last couple of rounds of QE from the Fed or from the Bank of England, despite the absence of crisis. You know, usually the excuse like Kevin Warsh will give will say, well, QE works in a crisis and doesn’t work in normal times. And actually in Japan it’s actually made some progress.

But there is this fundamental question of if you have everybody pushing the same direction—government, Bank of Japan, everybody pushing—and you still don’t get inflation, there is something going on there we don’t fully understand. And that’s true in the U.S. and Europe as well as Japan.

SHEARD: I think we can come back to this topic in the Q&A, because I do want to pivot to China now and get your views on China. You know, China now, of course, as we know, is the second-largest economy in the world just on a nominal GDP basis. But on the PPP calculation, purchasing power parity, it’s actually edged ahead of the U.S. So on any reckoning, you know, it’s a major, major economy now.

And China’s performance since the financial crisis has been absolutely incredible. If you just look at average GDP growth since fourth quarter of 2008, it’s 8.4 percent. Now, it’s slower now. But, you know, imagine that, in this most challenging economic time since the Great Depression, the world’s second-largest economy grows at above 8 percent consistently. So this is really dramatic; almost doubled in that period if you do the math.

Now China is slowing. And this year has sort of been the epicenter of, I think for the first time, a kind of global economic shock. Certainly the markets took it that way; some events, equity market, and then around the exchange rate, that widely regarded in the markets, at least, as being policy missteps.

Is the gloss coming off Chinese policymakers? As we speak, the fifth plenum, I think, is still continuing, maybe winding to an end in Beijing. And news is coming out to child—the one-child policy being kind of scrapped; lowering the growth rate for the next five years. The target has been lowered, I think, according to reports, to the strange number of 6.53. Adam suggested five plus three equals eight. That’s auspicious. So there’s something going on there.

But Taka, turning to you, I’d love to get your take on China; first of all, you know, the Chinese economy per se, and then perhaps we’ll talk about Japan’s strategy towards China. What do you think is going on there? Are you a China bull? China bear? How do you put it together?

ITO: Well, the growth rate slowdown as per capita income rise is natural process, and recall the convergence in growth theory that is happening. We experienced in Japan 10 percent in ’50s, ’60s. We went to 5 percent; ’80s and ’90s it’s a miserable 1 percent. ASEAN country—Korea is an ASEAN country—all did this. As income goes up, per capita income goes up, growth rate comes down. And this natural process in China will have 5 percent growth rate in five years, 10 years, and go down to 3 percent.

But—so I don’t put too much weight on this slowing down Chinese economy and that they have to get used to it; we have to get used to it. And the more serious matter is that can we trust that number, right? So some people say this is actually 5 percent instead of 7 percent. And, you know, they have to come, you know, clean on how they estimate and report their numbers.

And I think the shock was not only the growth slowdown but the mishandling of the stock market mini-crash and also currency policy. And I have serious doubts about how they see those market forces and how they can manage those market forces.

SHEARD: Thanks very much.

So let me go to you, Adam, on that point. Taka made the point that it’s natural that GDP growth should slow down as the country, you know, gets bigger and bigger. Of course, per capita incomes, though, in China are still relatively low—

POSEN: Yeah.

SHEARD: —I think around about $8,000 U.S., I think, per capita. GDP here in this country is around about $55,000, something like that. Japan is probably up in that bracket somewhere. So, you know, the conundrum, I guess, with China is it’s a huge—it’s become a huge economy—

POSEN: Right.

SHEARD: —before it’s achieved per capita—

POSEN: Right.

SHEARD: —you know, middle-income or developed-world status. How do you see—or do you think that China is going to be able to manage this sort of transition to the next stage of its economic development, which is going to require major reforms, major change of sort of the rules of the game in the economy? And you could—I don’t want to take the words out of your mouth, but you could view the so-called policy missteps in the first half of this year with the equity market and then with the exchange rate as being really kind of collateral damage that was done because China was actually trying to pursue a reform agenda around the financial system, which is absolutely mission critical.

POSEN: Yeah. I tend to take a more positive view, both current and medium term. I’m very influenced by my colleague at the Peterson Institute, Nicholas Lardy, who I think has made a pretty persuasive case that, A, the slowdown in China right now is not the middle-income trap kicking in, that it is a short-term adjustment; B, that the kinds of changes you’re talking about, Paul—and you’re absolutely right; they’re what’s necessary—are pretty much under way.

I mean, part of Nick’s analysis is using a variety of data to show that the service sector has continued growing. The service sector creates more jobs per capita, twice as many as the industrial sector; that credit is going primarily to the new private industries and to services. You know, not everything’s wonderful. I mean, when I say credit is going to these new things, that doesn’t mean they aren’t evergreening bad loans to the old state-owned-enterprise sector, something Japan is very familiar with in a different form.

So there’s problems there. But I agree with Nick. I think that there is more of a transformation going on. And I think the, frankly, screw-ups on the stock market and the exchange-rate communication are things that have to be taken seriously, but they’re not fundamental things.

I just—talking about the medium term, you phrased it very well about them being very large without yet per capita very rich in China. And I think another way to look at that is the question of, you know, what’s the frontier in the old American sense? You know, how much of the economy do you have left to bring into the formal economy, to bring into urbanization and so on?

And I think, there again, Nick and others have argued, and I find persuasive, including some Chinese scholars, there’s still a good 30 to 40 percent of the population to go. And it’s not like everybody who could in the northwest has already moved to Shanghai and has a job as a stock trader. You know, there’s a lot left to do. And so I think that’s another reason to expect it to go forward.

SHEARD: Staying with China for a moment, Taka, you know, looking sort of perhaps not within China but what China is doing outside China, clearly they have not just this domestic reform agenda but a reform agenda which probably has geopolitical dimensions but economic dimensions, obviously. I’m talking about such things as the Asia Infrastructure Investment Bank which they’ve launched, which Japan did not join, the U.S. did not join, I think Canada did not join. But many countries did.

The BRICS Bank, which has been a little bit in the shadows, but I think that process is going ahead; a lot of talk about this sort of one-belt, one-road concept of kind of infrastructure developments really sort of from China all the way through the Middle East and South Asia; Middle East way into Europe; very ambitious kind of infrastructure development plans; trying to get the renminbi into the IMF SDR, the special drawing rights, which sounds all very esoteric, but there are four currencies in that basket, the sort of international currency of the IMF—the dollar, sterling, yen, and Euro.

And it does look like we’re on the cusp of the IMF deciding to allow the renminbi in as well, which, you know, it’s a little bit controversial in some quarters but would be, I think, a huge badge of honor for the Chinese in terms of saying we’ve really arrived in terms of renminbi being acknowledged. And I think that would probably be a bit of a prize or reward for the reform elements in China as well.

So my question really is, you know, how do you see China’s sort of international economic strategy developing? And, you know, coming back to Japan, what’s Japan’s strategy in all of this? How is and how should Japan itself, more on the economic side than the political side—I think we’ll get to that later—be engaging with China and the rest of the world around this emergence of China as this economic and international powerhouse?

ITO: I think, Paul, you explained it very well, that Chinese strategy of expanding its economic sphere of influence. And I think, you know, there is great enthusiasm about renminbi about getting into SDR. I was in Beijing last week, and they are very enthusiastic about this internationalization of renminbi and they’ll do any reforms to get the renminbi to be used outside China. And, you know, frankly speaking, I think they are succeeding in internationalization of renminbi better than yen internationalization we tried to do in the ’90s.

And so, in a sense, I think in Japan it’s almost of the resignation to the rise of the power of China, economic power of China. I think political issues we deal with in next session. But I think, you know, Japan has to live with it. And I think the—you know, still it’s third-largest economy, and Japan should use those powers wisely. And that means that, you know, again, the three arrows should be succeeding.

SHEARD: Let me put you on the spot, if I may take the liberty. Do you think Japan should join the AIIB? (Laughs.) Do you want to go on the public record on that?

ITO: I’m already on the record in Japanese writing that I was against joining AIIB. The AIIB was framed by China as Chinese will take the number one voting share, headquarter location, and the top position. So the moment they proposed that the regional members collectively take three-quarters, outside members only one-quarter, means that Europe and U.S. at most one-quarter. And within three-quarters, China is more than half.

So this—announcing the framework, they are already number one in the governance. So they can do anything, right? And they also said, you know, no permanent—no resident board, which means that, you know, all the important decisions are met in the headquarter in Beijing and they circulate for the rubber stamps for approval in the non-resident boards.

So this is by design. It’s Chinese bank by China and for China. So I said, you know, if this design is not changed, then Japan has no reason to join. And we have Asian Development Bank, ADB. So we should help the ADB instead of, you know, getting into this AIIB.

SHEARD: So we’ve got sort of two crosscurrents here—China joining different things, China setting up parts of architecture that others—some join, some don’t. But one thing—one important emerging part of the international trading architecture is the TPP that you mentioned, Adam. And, of course, China is not a negotiating member, a founding member, of TPP. How do you see TPP fitting in? And can TPP actually be successful without China’s participation at some point?

POSEN: Well, so let me step back and put this a little bit, as you put it, to talk about what’s the strategy. So in Japan’s case, I think we all have to remember that Abenomics wasn’t motivated by economics. Abenomics was fundamentally about Abe and Aso and other people who cared a lot about foreign policy and Japan’s role in Asia to say we need to have economic oomph and stability that we will have a voice in Asia for at least a while and that if we don’t have that kind of economic attractiveness to others, whether as an ally to the U.S. or to other nations in the region and money to spend, we’re not going to be able to have a say in what happens to us.

So remember, Abenomics is—otherwise they would have been happy with where the economy was, or not so unhappy. Abenomics is fundamentally about allowing Japan to be out there. And we’re seeing that.

In the U.S. case—and this, I think, is more a question of congressional failures than of the Obama administration—I think we have to recognize that the lack of effective strategy is causing a problem. So the AIIB became something that opportunistically China could make something out of because the U.S. not only took a bad diplomatic tack in sort of ham-fistedly dealing with this, but is doing this against the fundamental background of we haven’t reformed the IMF, put in the money that the U.S. promised it would do, put in the reallocation of shares in the spirit that Taka spoke about, so that Asia is fairly represented in the IMF.

We haven’t fulfilled our obligations in any sense. In 2010 the U.S. government signed an agreement that we would do that, and the U.S. Congress has failed to pass any of that. And the Obama administration—here I do criticize them—has been ineffective or cowardly in forcing the Congress to do that.

And so that gives just a huge opening in the whole area of BRICS Bank, AIIB, and SDR for China to come up with the stuff, and gave them years in which to build this stuff up. So I think a lot of it is opportunism on China’s part, which I don’t like but I can fully understand and respect, when the U.S. has failed to deliver on its basic obligations as running the main international financial institutions.

So then when we get back to this issue of China is doing different things, I do want to pick up on what you said. I think it’s absolutely right. The place where the U.S. is strongest in terms of international economic leadership now is trade, and which is a crazy thing to say, given the way Congress is, given the fact that Secretary Clinton decided to kowtow to the unions—and I’m using the word kowtow in this context consciously—(laughter)—and make noise against TPP on a garbage non-issue even after she knew the whole strategic reasons for doing it and helped formulate it.

And I’m attacking Secretary Clinton on that because it’s such a disappointment and a reversal. And, of course, any Republican worth their name who’s anti-free trade doesn’t deserve to be out there at all. So, you know, this is obscene.

Now, that said, it’s all about relative. And the relative offer China has on trade to the rest of the world is, of course, infinitely worse. They have no standards, no respect for intellectual property rights. They always want to try to leverage other people’s materials and technology and patents whenever people invest there. They are not horrifically more bullying than other countries when they invest in places like Africa or Central Asia, but somewhat. So it’s not like they’re the desirable purveyor of money and influence, you know.

And so when you have TPP, assuming the Congress stands up for the American interest in the full sense and stands up for American consumers, when we pass TPP you have something that’s genuinely attractive. And Japan, as I indicated with agriculture, it hasn’t gotten rid of all tariffs on rice or on pork but has made huge strides. And it would be opening its markets basically more than anybody else in TPP. And that’s where the money is. That’s what’s actually making TPP go is the opening of Japanese markets to U.S. standards. And then you pull up Vietnam and Chile and everybody else, and potentially Indonesia, Philippines, and others who want to get in now.

So this is the best possible avenue the U.S. has in its hand at the moment, because it’s where China is weakest. It’s where Japan and the U.S. are best aligned. It’s where the U.S. has the most positive offer. Now, there is an issue. You don’t want this to be anti-China. There are people who are going to sell TPP in Congress and in public as, oh, good, we’re encircling China, all these lovely democracies and quasi-democracies, and we’re excluding China.

That’s wrong. What you need is open regionalism, saying if China is willing to meet these standards on human rights, on intellectual property, on labor, on environment, on adjudication of disputes, then they can join. And that’s a very high standard. And China is not going to be able to meet that any time soon, but it’s the right way to go. You say you want to do it? Do it.

And to China’s credit—and here I actually sincerely have to give them credit, not just opportunism—they’ve been very mature over the last two years in their treatment of TPP. They keep saying, well, we’re doing our own thing, which is called RCEP, which frankly isn’t even worth the acronym. But anyway, we’re doing our own thing. You can do your thing. Just keep us apprised. Don’t exclude us. And even very recently they just came out again and said we someday want to join TPP. And my colleagues, Gary Hufbauer, Sean Miner, and Fred Bergsten all came out with a strong advocacy for bringing China into APEC and TPP if they meet the standard.

So to me this is the biggest win in foreign economic policy we can do in Asia. And again, the burden is on the U.S. If simply Congress bloody passes this thing, it will all cascade nicely.

SHEARD: Was that a technical term?

POSEN: Which one, bloody or pass or TPP?

SHEARD: OK, thank you very much. That was very passionate and persuasive.

So at this point I’d like to bring the members into the conversation, and also like to remind everybody, as we said, this is on the record. So we’ll have a microphone. Please wait for the microphone to come. If you could state—you’ll stand and then state your name and affiliation, and also keep to one question.

So the lady down here, I think, is the first member.

Q: Bettye Musham, Gear Holdings.

In Japan, the aging of the population and the zero immigration policy, except for jobs that are dirty and dangerous, has led to more women entering the workforce. But once they enter, they’re not promoted like the men. And when I questioned this with this largest retailer in Japan that I worked with for over 30 years, they say it’s cultural. Now, do you think that they’re going to do something about their culture? Or when are they going to recognize the role that women could bring to the economy?

POSEN: Paul, do you want us to respond or do you want to collect some questions?

SHEARD: No, I think we’ll just respond one by one. So maybe, Taka, you could start with that. But perhaps I could just, while you gather your thoughts, just frame it a little bit more. You know, it’s often said there’s no immigration; there’s no population strategy. One of the things that’s being sort of interesting to me, watching these thick reports piling up, as you mentioned—you know, the first report, the second report, the third report—is that slowly it has been moving in the direction of recognizing that Japan does need to do something about its declining population.

In the most recent report that came out—I think it’s called Abenomics Round II—the idea—and population in Japan is about 127 million at the moment; peaked, I think, at 128 (million) in 2008 and ’10, around that period—but according to many of the government projections themselves, it’s slated to fall below 100 million, I think, by 2048, according to one of the simulations. And the government has come out and more vocally said they have a target, a policy to keep the population decline below 100 million; in other words, above 100 million. Don’t let it go below. And for the first time there was a target introduced on the fertility rate, the birthrate, to try to lift that from 1.4 to 1.8.

So if you could also address, you know, is this area of policy and thinking in Japan actually on the move? But can it ultimately succeed without some deep cultural changes, as the member was querying?

ITO: I think, Paul, you hit right—the right questions, sub-questions. You know, I think the question had, you know, immigration problem, women problem, and, you know, promoting women problem, and keeping the career for the women problem.

So sub-questions are: Is Japanese government allowing more immigration, more people to come? The answer is yes and no. First of all, “immigration” is a forbidden word. It’s called “foreign workers” in prime minister’s office. So are we promoting more foreign workers? Answer is yes. And the stated goal is that, you know, anybody who has high skills are welcome. If you have a Ph.D., you are welcome.

But also stated policy is that we don’t need unskilled workers. But in fact, unskilled workers are coming into Japan in the name of students and the trainees. And Japanese universities have many foreign students. And they are allowed legally to have part-time jobs up to 28 hours a week. And this is outrageous. They’re not studying in the Japanese universities but they’re doing part-time jobs in restaurants, the convenience-store cashier, and so on. So you see proliferation of the foreign workers de facto, OK.

I think it’s much better to have more legal framework for part-time—not part-time but full-time workers. Foreign workers who want to come to Japan and work we should welcome for any job skills, because we are in shortage of workers. And if we don’t allow those workers, they find a way to come in like student status. And that’s not good. So I’m all for increasing foreign workers in any job skills.

Now, there are some job skills—job categories which we are already finding sharp shortage of the workers. And then government is doing something to allow them. But it’s—I’m not going into detail, but it’s a long way to go.

Women—I don’t—if it is a culture, culture is changing. And I think clearly the women are promoted, and “womenomics” is succeeding, as Adam says. And there are almost, like, affirmative action in Japan. So this is changing.

The part that I think we need to do a lot is this fertility question. It’s not just raising fertility. It’s not policy, but we—to have more babies. But the couples do desire to have two children if they are asked in the survey. We’re just realizing—we should be realizing their desire. And so 1.88 is probably a good number. But, you know, the government should go into the details why it’s not happening, why the desire of the average couple is not realizing.

And, you know, one is that it’s awfully difficult for women to continue the work when they have the baby. So as Adam pointed out, the M-shaped curve, which there’s a drop in the women labor participation in the age bracket 25 to 40, this valley is getting shallower. That’s good. But maybe they’re doing part-time job instead of keeping the career job to continue to accumulate human capital.

So we have to devise the ways that women can keep same job throughout childbearing and caring years. And that’s where government is still failing, I would say. We need more child care, nursery, and maybe foreign nannies and foreign household help and those. That’s area that we need most.

SHEARD: Unless you have something to add—

POSEN: No, no, no. That’s fine.

SHEARD: Can we go to the next question? Thanks.

Q: Thank you very much. Mahesh Kotecha.

My question is regarding the AIIB. You took a strong position on that. In fact, if you look at other regions in the world—Latin America, for example—there’s Corporacion Andina de Fomento, where U.S. doesn’t have much of a role. There are other regions. African region has many smaller development banks. I think it’s completely normal for a large region to have a bank that is regional where the participation of OECD countries is limited.

So why you object to AIIB? Why not participate and influence through soft power the policies such as environmental issues and other governance issues by being a part of it rather than being outside of it? It seems to me U.S. made a mistake, and so is Japan making a mistake. Why would you not reconsider and participate to bring more kind of international best practices to the Chinese-dominated bank?

ITO: Right. So what you described is—I would categorize into the investment bank rather than multinational—multilateral development bank. And when you talk to Chinese people, they say EIB, European Investment Bank, is a model. And a model means that not having resident board and they decide—they mutually invest each other. So EIB has basically EU members, and they do invest in Germany or France, those high-income countries. So it’s not development assistance, multilateral development bank, but, you know, similar income level, similar economic structure. And they friendly—they invest each other when they identify infrastructure thing.

I don’t think Chinese idea of this AIIB is not like EIB of friendly nations, similar economic development status nations to invest each other. It’s much more like Chinese putting money into the infrastructure with others to the Central Asia and South Asia and others. That’s much more geopolitical implications. And for that, I think, again, going back to the governance issue, that we need a governance to say this investment project is worthwhile and not violating environment standard and civil rights and so on.

So I’m not against Japan, U.S. joining AIIB. But to do that, to join, we need this governance structure within AIIB to be reformed. So once it’s reformed as a multilateral development bank, Japan should join and U.S. should join. But there are conditions. It’s like TPP in reverse, that if they have the good standards then Japan and U.S. should join.

SHEARD: Adam, what’s your view on it? Because it’s not just Japan that didn’t join the AIIB; the U.S. as well.

POSEN: As much as I like Taka’s reversing the issue of standards that way, I’m actually more sympathetic to the questioner. I think the big mistake of the U.S. wasn’t so much to not join as to make this into something that actually mattered. It really doesn’t. OK, this is—it only matters in the context of what I was saying earlier, the U.S. failures to provide proper access and governance for the international financial system and proper funding and recycling of funds in Asia and Central Asia.

This isn’t the Asian monetary fund. This isn’t something—competing conditionality in monetary affairs has a thing that sort of breaks down standards throughout the world. Lousy development lending is unfortunately all too common. And if the Chinese want to waste a bunch of money doing lousy development lending, you know, I’d rather they didn’t do it in an environmentally unfriendly way, but on the other hand, I’d rather they learn a lesson that throwing money at things isn’t going to work so well, just as the U.S. and Japan and others have learned through the years. So basically I don’t really care.

We did a major event on the multilateral development banks at the institute a few weeks ago talked of this. There are actually—you mentioned one example. Taka mentioned EIB. There are actually over 50 of these kinds of things in the world, most of which we haven’t heard of, for good reason. And none of them are systemic or set a huge precedent for any of the others.

The one thing I would say is the Asian Development Bank is actually a good institution. It is de facto Japan and U.S.-dominated. So it’s understandable why the Chinese and others try to get around it. But let’s be very clear here. The Asian Development Bank actually is working out a decent modus vivendi with the AIIB. And the person who’s running the AIIB for China, Jin Liqun, used to be a vice president of ADB. And the Japanese head of the ADB, former Vice President Nakao, is actually very sharp and very well respected in China as kind of a fair broker.

So, again, I actually—I take Taka’s point. I take your point. I’d rather we just let this subside and let’s just let it go forward. And if it screws up, let the Chinese learn something. And if it doesn’t screw up, let the Americans and Japanese join. Let’s just calm down about it.

SHEARD: Question over here.

Q: John Wheeler.

Just a follow-up question on the consumption tax. I was at an economic seminar yesterday on the Japanese economy, and two very prominent economic experts had a very lively debate on the consumption tax and what the implications would be. One, I guess, basically agreed with the panel, saying, given Japan’s deficit, it’s absolutely essential that it be raised. It needs to be raised in 2017.

The other argued that, no, that consumption was the main issue, and this was the most disastrous policy thing you could possibly do to have Japan grow in the future, that consumption is the key issue and it was a mistake to raise it 8 percent. It’s going to be a mistake to do it in 2017. I just wondered if you could counter that argument.

POSEN: Can I go first on this one?

SHEARD: Yes, please.

POSEN: I’m seen by some of those people on that side as a prodigal son, because I was the one in ’97, ’98, arguing very much against that consumption tax rise and did a lot of the academic work showing, contrary to people’s expectations, that really was very harmful. And I came out, as Taka and others did, and said, no, I want the consumption tax rise to have gone through.

And the reason I changed my mind is, you know, as I guess Prime Minister MacMillan once famously said, events, dear boy, events. You know, it’s now 18 years later. The Japanese situation is worse on the debt front, worse on the demographic front. They had the unfortunate shock, triple shock, of the Fukushima disaster.

All this says that realistically they have less fiscal room to play now than they did 18 years ago. And therefore it is reasonable to reassess and say while trading off the high short-term costs for long-term benefit in the midst of a terrible recession in 1998 probably wasn’t worth it, trading off the short-term costs for the long-term benefit in the midst of a very supportive monetary environment and much less room to fall back now is worth it.

And I think people are just—I think the people are dogmatically saying, you know, because it’s very costly in the short run, it can’t be worth it, are mistaken in two senses. I mean, this is sort of how Paul set up the initial question. I know he doesn’t believe this. But it’s sort of, you know, you’re either in the camp this is horribly destructive and therefore we shouldn’t do it or the consumption tax won’t hurt at all, and therefore we should do it. I’m in the it is going to hurt but you have to do it anyway. And I think it’s just a balance of costs and benefits on the hurt versus what you lose at this point is worse than it was 15 years ago.

SHEARD: Did you want to add to that, Taka?

ITO: Yeah. So I’m going to turn around the question and ask to those who advocate no tax increase that will consumption rise if we don’t raise taxes? There’s no guarantee, right? The population is shrinking. And if their wages are not rising, they will not raise consumption. So you wait consumption to come back, sharp increase, wait a year, two years, five years, 10 years, and it may never come. Then we have the huge debt and fiscal crisis almost certainly come.

The population is declining, which means that the market is shrinking. And we need, you know, innovation and other things to get the wages up and consumption be sustained. But that’s different question from the tax increase. And we should be putting more efforts to those wage issues and labor-market issues and the intergenerational issues that elderly—the retired is taking more resources out of the young over the time. And we need to address that. So that’s an important question.

So technically we need to find out what the potential growth rate is. And if it’s above the potential growth rate, which is, I would say, positive number, then we should be in the medium-term consolidation path.

SHEARD: Perhaps just—I’m sorry; just to add my perspective, because it’s a little bit different from the panelists.

You know, a consumption tax hike is two things simultaneously. One is it’s fiscal reform, to improve the fiscal system, on the tax side in particular. But it also has a short-term effect on aggregate demand. It’s a demand-impacting measure as well. And so I think the debate in my mind is all about the sequencing and the timing.

And I would certainly—and this is probably where I would part a little bit with the panelists—put the priority on making sure that the economy is well out of deflation, is achieving the targets that were actually put into the consumption-tax legislation as forward-looking targets on which the consumption tax hikes were being predicated, which is 3 percent nominal GDP growth, comprising 2 percent real and a 1 percent GDP deflator, and to see that on a more sustained basis, because I think the problem—I see ending deflation as the first step towards fiscal consolidation. So it’s really more of a timing issue, just to give a different perspective.

But I saw some hands go up. I’ve got five minutes left. So down here.

Q: Sheldon Kasowitz, Indus Capital Partners.

Staying with the same topic, and paraphrasing another Englishman, maybe we’re arguing over price. Your—you cite many studies and the general feeling in Japan that the rate should go to 20 to 25. I’ve seen numbers as high as 30 or 40; some arguments. And without getting too into the very detailed flows, there are moves afoot to tighten collections, my number and other measures, that will have some positive effect. If one gets to 3 or 4 percent nominal growth, then you kind of let it run. During the Koizumi years, expenditures were basically held flat.

SHEARD: Right.

Q: There are other ways through fiscal consolidation. But it seems to me the presumption is 25 percent or some number as the magic number. I’d like to hear both your comments on levels.

POSEN: Let me give you my thing. And you’re absolutely right. There are many ways to skin the cat. However, there are—since you have to keep skinning the cat every year, it’s a question of what causes the least loss of fur. (Laughter.)

Putting it a little more concretely, you know, there are things going on and there are alternative means, right? So there is actually—and Taka didn’t mention this—but there is actually a pretty significant change in the way pensions are being distributed, and the actual real value of pensions is going down the last few years. And they’ve changed the indexing rules. And, going forward, that’s going to make a material difference.

There are a lot of things like that you can do. The problem is the Japanese state, as it stands, is actually relatively small as a share of the economy compared to most other economies. And to the degree it’s going to rise, it’s about looking after old people from a health care point of view. And you can force a certain amount of self-insurance, and already you do, but there are limits, both on humanitarian and efficiency grounds, to how far you want to go with that. And if you do want to raise military spending or self-defense spending, even a full percent of GDP a year, you’ve got to find the money for that somewhere else too.

So by the time you do all that, it’s like the issue with discretionary spending in the U.S. budget, but even more so. There aren’t that many things you can cut. You know, you can be more miserly with pensions and with health care, and that’ll matter. That’ll cap future rises. But that’s not going to save you that much now.

And so this is why most people, myself included, end up coming back to a consumption tax. A consumption tax is not the best thing ever, and it’s certainly—and this is where I thought Paul was going to go—it certainly has—even though I agree with Taka, it’s not clear that not raising the tax leads to a rise in consumption—it clearly, over time, will—you know, will be something of a disincentive to consumption if you raise it a lot.

So it’s not ideal. But on a lot of other bases, it’s efficient. It’s easy to collect. It’s easy to monitor. It’s easy to implement. There’s no delay. Everybody knows it’s there. Once it’s there you can be sure that it’s still there. There are a lot of reasons why, if you have to raise a lot of tax revenue, that’s the way to go. And that’s why people have kept doing it.

Now, again, you can say what’s the right number. I choose to say minimum 20 percent. But just because if you look at the numbers, you do need—you do need basically a rise in tax revenues on the order of 20, 30, 40 percent to make anything go. There just isn’t enough other stuff there. You have to get that much more tax revenues.

I think collection—there are differing estimates, but I don’t think it gets you more than 5 percent. So then you’re just left with what else can you do. And that’s how you end up with a consumption tax.

SHEARD: Just a number, Taka. I want to get one more question in if I can, so very brief.

ITO: So, yeah, Koizumi years, yes, the deficit has declined. But we are facing much severe situation now, that all the Baby Boomers, the age between 62 to 67, right now are retiring in the next five years. And there will be the other side of the fence, collecting pensions rather than contribute—paying in the contributions. So the times are different, and we need much more tax collections. How to get taxes from the retirees? Consumption tax. We cannot solve it with the labor income tax.

SHEARD: But they’re also living another 20 years. So maybe the idea would be not to retire and to—

ITO: Well, they have forced retirement at age 65.

SHEARD: No, I’m saying maybe that should be changed.

ITO: I had to come to U.S. to work, right? (Laughter.)

POSEN: It’s true. On the other hand—on the other hand, let’s be very clear, leaving Taka’s personal situation out of it. (Laughter.) If you don’t have retirement age and you want to promote women and you want to give young people a chance, in the seniority-based Japanese system that’s going to be awfully hard. So there is actually another argument for forcing some retirement in Japan.

SHEARD: If somebody’s got a really quick question, we can sneak it in. No. Yeah.

Q: Nakayama Siri (ph).

The reform of the IMF and reform of ADB will make AIIB issue less important from your point of view?

POSEN: Well, I think that was already what I said, so yes.


ITO: Yes.

SHEARD: Great. Short question, short answers. (Laughter, applause.)

On that note, I’d like to bring the session to a close. I’d like to thank our panelists for a very insightful discussion, thank the members for helping to make this a very lively and enjoyable session as well.

A coffee reception is now going to follow outside. Hope that you can all join us for that. And then the second session will begin at 11:00 a.m. So if you could thank the panelists. (Applause.)


This is an uncorrected transcript.

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