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Forbes: Japan’s Market Economy Is Thriving, But For Troubling Reasons

Foto: Japanexperterna, 2014 (CC BY-SA)

Foto: Japanexperterna, 2014 (CC BY-SA)

Recently published in Forbes.com, Masazumi Wakatabe, a Professor of Economics at Waseda University in Japan, and currently a visiting fellow at the Center on Japanese Economy and Business at Columbia Business School writes about Japan’s seemingly thriving market economy. Here is an excerpt. For the entire article along with interesting links, click here.

Wakatabe: While trust in Japan’s corporate elite is eroding, the country’s market economy is thriving. Too bad it’s for troubling reasons.

Exhibit A: According to media reports in April, people were selling cash on Mercari, a online Japanese auction company–at a premium.

For example, people auctioned off 10,000 yen but at the price of 13,000 yen. Why would people pay 3,000 yen extra to get cash? The reason is quite simple: People want cash at a lower cost than they would get it somewhere else. A money lender would charge an exorbitant interest rate.

After being notified, the company acted swiftly and banned people from auctioning cash. However, in the market economy, people come up with alternatives. They began auctioning charged electronic travel cards, gift cards and even bundles of receipts detailing money spent but not by who. (Rumor has it that some business owners in Japan need receipts to avoid paying taxes.)

And as soon as these items were banned, other alternatives sprang up. Like an Ema, a small wooden placate with a picture of a horse traditionally considered a lucky charm in Japan, with a 100,000 yen cash back option (here, in Japanese).

Or a second-hand book written by Yukichi Fukuzawa–one of the best thinkers in modern Japan and a founder of prestigious Keio University–with his “portrait” card inside. Fukuzawa’s face appears on the 10,000 yen bill, meaning the “portrait” card is just that.

So although the book itself is worth perhaps around 100 yen, the one with a “portrait” sells for 15,000 yen.

Exhibit B: There’s also news about increased incidents of gold being smuggled into Japan from foreign countries. That’s right, gold.

Why? Many speculate that this has something to do with the consumption tax (here, in Japanese).

Importing gold from a foreign country, say South Korea, through official channels incurs the importer 8% consumption tax. So gold worth 1 billion yen would incur a consumption tax of 80 million yen. This gives people every incentive to avoid paying the tax.

There’s evidence to support the theory: After the consumption tax hike, there was a jump in the number of smuggling of gold. There were only eight incidents in 2013, but the number increased to 177 in 2014 when the consumption tax was raised from 5% to 8%. Then to 294 in 2015.

What these two examples prove is that the Japanese are no less inventive or rational than other people in the world. Seemingly bizarre behaviors are the consequences of policy and institutions–and Japan needs better ones.

Biography of Masazumi Wakatabe: I am a Professor of Economics at Waseda University in Japan, and am a visiting fellow at the Center on Japanese Economy and Business at Columbia Business School from March 2017 to March 2018. I have been closely following Japan’s economic and monetary policy and my comments have been featured on various media outlets such as NHK and the Financial Times. Trained as a historian of economic thought, I comment on current topics in the Japanese economy with a historical perspective. I have published several books in Japanese, including one with Koichi Hamada, current advisor to Prime Minister Shinzo Abe. The book entitled Studies on the Showa Depression, edited by Kikuo Iwata, to which I contributed, was awarded the Nikkei Best Book of Economics and Business in 2004. My most recent book, Japan’s Great Stagnation and Abenomics (PalgraveMacmillan), was published in April 2015.

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