Winny was Found Innocent

Kaneko Isamu, the author of Winny, the popular P2P software, was found innocent in the appeal court.

See the comments on Winny by Larry Lessig and me.

Kamei might Blow Up Hatoyama Administration

Kamei Shizuka, the Minister of Postal Office and Financial Services, told Reuters that he would enact a moratorium of repayment of bank loans. "If the financial world gets scared at the talk of a moratorium, that shows how frail Japan's financial sector is", he said.

But how about the bank's loss? Kamei said that the government should bail out the banks that would be hurt by the moratorium.

The govenment bails out lenders with taxpayer money, so it makes sense that there should be a moratorium for borrowers when they get into trouble. We have to think about the borrowers, not just the lenders.

Well, this is an extreme version of "financial socialism" for which the FRB is attacked in the U.S. Finance Minister Fujii dissented, but Kamei said "Shut up. This is my business." He is right. Since the MoF and the FSA were separated, Fujii can't stop Kamei.

As Tobias Harris admitted, Kamei's appointment is a big mistake of Hatoyama. Although Kamei is the head of a minor party, he is as experienced politician as Ozawa. He has many connections including "black" people and, as a former high official of police, he knows many scandals of politicians. When he threatened PM Abe with a leaked information in a weekly magazine, Abe rebutted that Kamei would be more scandalous if all weekly magazines were right.

Probably it's only Ozawa who can control Kamei. Unlike western politicians, personal connections ("kao") are much more important than parties in Japan.

Hatoyama Is Attacked by Geeks for Breaking the Promise

The biggest topic about Hatoyama administration on the Web was the news never reported in the major media: exclusion of reporters outside of the press club from the press conference. It's outrageous because Hatoyama promised in a press conference, when he was a leader of the opposition party, that he would open the press conference of the Cabinet if he would be the Prime Minister.

Jimbo Tetsuo, a video journalist on the Web, went to the Prime Minister's office on September 16 but blocked by the guards. He investigated the reason and reported it in detail. According to him, the Chief of the Cabinet Hirano Hirofumi admitted only five reporters from magazines and some more from foreign press as observers who couldn't ask questions. If it's true, Hirano broke the promise that his boss made in the press conference.

As the DPJ doesn't disclose the detail yet, it's unclear who is to blame. But some lawmakers were attacked in Twitter and promised to investigate the process. Foreign Minister Okada Katsuya promised to open every press conference for any media. However, it was only Sports Nippon that reported the news.

Even for me, who was working for a TV station, the closed nature of Japan's press club was bizarre. Japan is only one country in the world that has such clubs. Foreign press has attacked and laughed at it for a long time, but LDP and bureaucrats protected the clubs because they can manipulate media easily via them.

However, the change will come. My message about Okada's decision collected more than 200 Re-Twitters in an hour. All of them applauded Okada. If Hatoyama follows Okada, the DPJ would be supported by geeks, who represent the coming generation.

Hatoyama's NYT article is forged?

Yukio Hatoyama's "Op-Ed" article in NYT is not written by him. Probably it was translated from his article in Japanese magazine "VOICE" by Christian Science Monitor without permission by Hatoyama.

This is copyright infringement and misleads many people to assume Japan's next Prime Minister embraces "anti-globalism". FT.com quoted it more accurately. NYT, CSM, Huffington Post, and other journal that published the article should delete it and apologize.

Update: According to Yomiuri, Hatoyama office translated and published the article. CSM might have abridged it.

Update2: A DPJ official said that an agent of LA Times in Japan contacted VOICE, but he didn't tell that the article would be circulated via syndicate, Global Viewpoint of which NYT and LAT are members. Japanese version.

Why Japan Is So Slow

Today I talked with a correspondent of The Economist about the problems of Japan. He asked me why Japan is so slow to change in such self-evident problems as flexible labor market, active capital market, and globalization. It's very difficult because these problems are not self-evident for Japanese politicians and businessmen.

The core of the difficulty is the labor market. So-called lifetime employment and seniority wage is losing substance, but still persist. And temporary workers account for 1/3 of all the workforce, which the OECD calls "dual labor market". This is a collusion of managers and labor unions to protect their jobs by excluding young workers from the labor market. Since it's practically impossible to fire "normal workers", companies change workers to temps.

The OECD recommended Japanese government to make labor market flexible by "reducing the worker protection". But the government is going to eliminate short-term temps. The Democratic Party of Japan proposed a bill to ban the temp workers in manufacturing industries. It will only make temps unemployed, but it's politically incorrect to make firing workers easier.

The problem of capital market is related to that of labor market. Typical Japanese worker is employed for life and his salary increases by age. So his productivity is higher than his salary in the younger age, and lower in the older days. In other words, he "saves" his salary to the company in the younger age and "draw the deposit" when he is old. If he quits the company at the age of 40, he would lose 100 million yen ($ 1 million) in the lifetime salary. So it isn't a good decision to start up a company if you can't earn more than 100 million.

And the fundamental problem is the industrial structure: Japanese manufacturers were super-efficient in the integrated products such as cars and VTR that need complicated coordination. But the Information Revolution made products "modular" and standardized. The parts of PC are made in various countries and distributed globally, so Japanese advantage of coordination disappeared in the IT industries.

But why aren't they good at coordinating global division of labor, while they are so good at coordinating keiretsu relations with many companies? It's because the keiretsu coordination is based on implicit contracts between suppliers and makers. There are few problems of moral hazard due to asymmetric information, because they know each other closely. Global partnership is a strategic relation based on explicit contracts. Japanese managers aren't good at strategic decisions to profit from contracts, because they are promoted by consensus and cooperation.

All these problems stem from the long-term relation between managers and workers, suppliers and makers, which was efficient when Japan was growing steadily and the future was always better and brighter. In terms of game theory, such long-term relation is efficient when the players of a repeated game are patient and the rent from the relation is large.

Now the game is over: when the future is not so bright, the payoff of "defection" would be greater than that of "cooperation". The long-term relation became inefficient and fragile. It also changed politics: the Liberal Democratic Party has redistributed the rent of growth, but the source of the rent dried up. So voters want change, but they don't know what to change. And the DPJ doesn't know either. We can't expect too much from them. Real change would occur when the LDP is divided after it loses the election, and the "third party" emerges.

Japanese Writers Said No to the Kurofune of Google Book Search

As reported by Mercury Project Office, 180 Japanese writers including Shuntaro Tanigawa announced to refuse Google Book Search settlement scheme on April 30.

Tanigawa is a famous poet and known for his activities for copyright protection. They says "We have impression Google is public". However they are upset and say "they are arrogance". Also 2,197 writers want to join the settlement while they do not want delete their works from Google's database. It looks like a signal not to trust the service.

Writers don't understand the settlement when they accuse Google of the "arrogance". Google doesn't respond because they are prohibited by law. It's up to the administrator of the settlement. The bureau chief of the American Writers Association, who came to Japan this week, said the settlement is favorable to copyright holders because it enables to monetize out-of-print books.

Japanese writers say this is the "Kurofune (Black Ships) of copyright" that invade Japan. However, the Kurofune, which came to Japan 150 years ago, didn't invade Japan but wanted to open the country for western countries. The Tokugawa government opened Japan and the Meiji government reformed it. That's why Japan wasn't colonized by western countries. Now Japanese writers seem more ignorant than our ancestors.

More about Negative Interest Rate

It's very much discussed in Japan, but American economists aren't familiar with it. So here are links:

• Tyler Cowen: Give every voter a federal debit card. And put the money in their accounts. Tell them if they don't spend it this month, the government will take it back.
  
  
• Bernanke: Deflation: Making Sure "It" Doesn't Happen Here
  
  
• Eggertsson-Woodford: The Zero Bound on Interest Rates and Optimal Monetary Policy
  
  
• Hiroshi Ugai (BoJ): Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses

There are many articles written about Krugman's article, but most of them are in Japanese. Overall, economists agree that negative interest rate is desirable if possible. But they are divided whether it's possible. Krugman argued it was possible, but he changed opinion recently. Bernanke commented on "flexible inflation objectives", but doesn't commit to the targeting.

Theoretically, the problem is how the Fed can make the expectation of inflation while it can't increase monetary aggregate. When the nominal interest rate is zero, as Krugman said, money and short-term bonds become perfect substitutes, so the Fed's operation will be buying a twenty-dollar bill with two ten-dollar bills. The BoJ tried the "time scale policy" to keep interest rate low until the inflation rate becomes positive. It was a little effective to suppress the long-term rate, but couldn't make inflation.

Greg Mankiw's Advice for Negative Interest Rate

Greg Mankiw recommends the negative interest rate in his NY Times article. He acknowledges Gesell and Keynes, but it's odd that he tells nothing about Krugman's famous article in 1998. In the article, Krugman built a toy model to recommend the inflation targeting to make the real interest rate negative. However, he writes in a recent entry of his blog:

In fact, I wrote down my original liquidity trap model starting from a firm belief that the liquidity trap was nonsense: even if the interest rate is zero, I thought, increasing the money supply must raise demand. So I set out to write a model with all the i’s dotted and t’s crossed, so as to demonstrate that point - and found, to my shock, that the model actually said the reverse.

What comes down to is this: once you've pushed the short-term interest rate down to zero, money becomes a perfect substitute for short-term debt. And any further increase in the money supply therefore displaces an equal amount of debt, with no effect on anything. Period, end of story.

If Mankiw hadn't read the 1998 article, I strongly recommend him to read it. If he read it, I wonder how he overcome the difficulty to make people expect inflation when the Fed can't increase the monetary aggregate, which Krugman gave up at last.

On the other hand, Mitsuhiro Fukao proposed a more direct way to make the interest rate negative - to tax the cash. It sounds even more bizarre than artificial inflation, but Fukao insists that it's legitimate to tax the cash. Other economists propose to make interest rate negative by electronic money.

Indeed Japan's experience of the "lost decade" isn't shared by American economists...

Paul Krugman's Contradictory Advices to Japan

Krugman is not known for consistency, but his comments on Japan's "lost decade" are remarkable. These are his advices:

Article in 1998: If the Bank of Japan adopts the inflation target of 4 percent for 15 years, it can create inflation expectation and escape from deflation.

NYT blog in November 2008: No matter how much Japan increases the monetary base now, expectations of future money supplies won’t move if people believe that the Bank of Japan will move to stabilize the price level as soon as the economy recovers.

Interview with the Yomiuri Shimbun in January 2009 (in Japanese): The Fed should make the inflation target of 4 percent for 15 years.

Rolling Stone in January 2009: There's no realistic prospect that the Fed can pull the economy out of its nose dive.

NYT blog in March: once you’ve pushed the short-term interest rate down to zero, money becomes a perfect substitute for short-term debt. And any further increase in the money supply therefore displaces an equal amount of debt, with no effect on anything.

Interview with VOICE in April (in Japanese): The BoJ should adopt the inflation target of 4 percent for 15 years.

In American media, he denies the effectiveness of the inflation targeting, but he insists on inflation targeting in Japanese media. Does he talk different economic theories in English and Japanese?

Martin Wolf's Wrong Lesson from Japan

Martin Wolf writes:

Despite a loss in wealth of three times GDP and a shift of 20 per cent of GDP in the financial balance of the corporate sector, from deficits into surpluses, Japan did not suffer a depression. This was a triumph.

It would be happy if our bitter experience in the 1990s were a triumph. Unfortunately, he is wrong. His only source is a book by Richard Koo, an economist who is not respected very much in Japan. His new book, The Holy Grail of Macroeconomics is full of factual errors.

He insists that the wasteful spending policy of Japanese government in the 90s rescued Japan from depression. The fact is shown in Fig. 1. Real GDP growth of Japan became negative after the first fiscal stimulus in 1992. After the biggest stimulus in 1998, GDP fell negative again. With additional stimulus in 1999, growth became slightly positive, but fell negative in 2001. Apparently the spending of a hundred trillion yen didn't much help.


Fig. 1Wolf writes:

The explanation was the big fiscal deficits. When, in 1997, the Hashimoto government tried to reduce the fiscal deficits, the economy collapsed and actual fiscal deficits rose.

This is wrong, too. Fig. 2 shows the real GDP growth from 1996 to 1997 in Japan. It shows that GDP rose in 10-12 in 1996 because consumers bought expensive goods before the tax hike in April 1997. Then GDP fell as a rebound in 4-6 and 7-9 in 1997. It recovered to the normal level in 10-12. In 1998, the GDP collapsed because of the credit crisis triggered by the bankruptcy of two major financial institutions in November in 1997.


Fig. 2
These are conventional wisdom among Japanese economists. If Wolf read, for example, Ihori et al., he would find that Koo's argument is completely refuted by professional economists. Their paper is written in Japanese, but FT must have translators. If you talk about Japanese economy seriously, you should read serious articles mostly written in Japanese. We don't talk about British economy with reading only one paperback in Japanese.