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Japan burdened by huge debt, needs tax hike and belt-tightening
By Heizo Takenaka |
June 4, 2010, Friday
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Print Edition
Print Edition
THE Greek fiscal crisis has sent shockwaves through markets around the world.
Now other European Union countries seem under threat, and the EU and the International Monetary Fund are grappling to stem the crisis before another nation trembles. But the problem of excessive government debt is not confined to the EU.
Indeed, Japan's debt-to-GDP ratio is around 170 percent - much higher than in Greece, where the figure stands at around 110 percent.
But, despite the grim parallel, Japan's government does not seem to think that it needs to take the problem seriously. Yukio Hatoyama's government (Hatoyama quit on Wednesday as prime minister) ignored macroeconomic management by abolishing the policy board charged with discussing economic and fiscal policy.
Instead, the government focused on increasing spending to meet its grand electoral promises, including a huge amount for new grants to households and farmers. As a result, the ratio of tax revenue to total spending this fiscal year has fallen below 50 percent for the first time in Japan's postwar history.
Despite the weakness of Japan's fiscal position, the market for Japanese Government Bonds (JGBs) remains stable, at least for now.
Lost decade
Japan had a similar experience in the 1990s, the country's so-called "lost decade." At that time, Japan's budget deficit soared after the country's property bubble burst, causing economic stagnation. But JGBs are mostly purchased by domestic organizations and households.
In other words, the private sector's huge savings financed the government's deficit, so that capital flight never occurred in the way it has in Greece, despite the desperate budget situation. But this situation has deteriorated recently, for two reasons.
First, the total volume of JGBs has become extremely high relative to households' net monetary assets. But in mere three years, total JGBs will exceed this total. This suggests that taxpayer assets will no longer back government debt, at which point confidence in the JGB market is likely to shatter.
Second, Japanese society is aging fast. As a result, the country's household savings rate will decrease dramatically, making it increasingly difficult for the private sector to finance budget deficits.
Moreover, an aging population implies further pressure on fiscal expenditure, owing to higher pension and health-care costs, with all of Japan's baby boomers set to reach age 65 in about five years.
Given these factors, the JGB market, which has been stable so far, will face serious trouble in the years ahead.
Tax hikes may help. But tax hikes alone with not close Japan's fiscal black hole. What is most needed is consistent and stable macroeconomic management. Such management is possible.
Budget balance
Between 2001 and 2006, Japan aggressively tackled fiscal problems by creating a smaller government and setting clear numerical targets for fiscal consolidation, including a primary budget balance in 10 years. If this effort had been continued for about two more years, a primary budget surplus could have been realized.
But over the past three years, a populist trend in fiscal expenditure has taken hold. What is needed most now is for Japan to restore comprehensive economic management. A tax hike is only part of that.
Without a strategy for growth, an effort to reduce government spending, and a policy to stop deflation, a tax hike will not solve the problem. Indeed, some economists fear that a fiscal crisis could erupt even after a tax hike is passed.
Once that happens, the impact on neighboring countries - and on the world economy - will be huge compared to the current European problem. After all, Japan remains the world's second largest economy, accounting for about one-third of Asia's GDP, and 8 percent of global output, whereas the GDP share of Greece in the EU is about 3 percent.
(The author was Japan's Minister of Economics, Minister of Financial Reform, and Minister of Internal Affairs and Communications. He is now director of the Global Security Research Institute at Keio University, Tokyo. The views are his own. Shanghai Daily condensed the article. Copyright: Project Syndicate, 2010. www.project-syndicate.org)
Now other European Union countries seem under threat, and the EU and the International Monetary Fund are grappling to stem the crisis before another nation trembles. But the problem of excessive government debt is not confined to the EU.
Indeed, Japan's debt-to-GDP ratio is around 170 percent - much higher than in Greece, where the figure stands at around 110 percent.
But, despite the grim parallel, Japan's government does not seem to think that it needs to take the problem seriously. Yukio Hatoyama's government (Hatoyama quit on Wednesday as prime minister) ignored macroeconomic management by abolishing the policy board charged with discussing economic and fiscal policy.
Instead, the government focused on increasing spending to meet its grand electoral promises, including a huge amount for new grants to households and farmers. As a result, the ratio of tax revenue to total spending this fiscal year has fallen below 50 percent for the first time in Japan's postwar history.
Despite the weakness of Japan's fiscal position, the market for Japanese Government Bonds (JGBs) remains stable, at least for now.
Lost decade
Japan had a similar experience in the 1990s, the country's so-called "lost decade." At that time, Japan's budget deficit soared after the country's property bubble burst, causing economic stagnation. But JGBs are mostly purchased by domestic organizations and households.
In other words, the private sector's huge savings financed the government's deficit, so that capital flight never occurred in the way it has in Greece, despite the desperate budget situation. But this situation has deteriorated recently, for two reasons.
First, the total volume of JGBs has become extremely high relative to households' net monetary assets. But in mere three years, total JGBs will exceed this total. This suggests that taxpayer assets will no longer back government debt, at which point confidence in the JGB market is likely to shatter.
Second, Japanese society is aging fast. As a result, the country's household savings rate will decrease dramatically, making it increasingly difficult for the private sector to finance budget deficits.
Moreover, an aging population implies further pressure on fiscal expenditure, owing to higher pension and health-care costs, with all of Japan's baby boomers set to reach age 65 in about five years.
Given these factors, the JGB market, which has been stable so far, will face serious trouble in the years ahead.
Tax hikes may help. But tax hikes alone with not close Japan's fiscal black hole. What is most needed is consistent and stable macroeconomic management. Such management is possible.
Budget balance
Between 2001 and 2006, Japan aggressively tackled fiscal problems by creating a smaller government and setting clear numerical targets for fiscal consolidation, including a primary budget balance in 10 years. If this effort had been continued for about two more years, a primary budget surplus could have been realized.
But over the past three years, a populist trend in fiscal expenditure has taken hold. What is needed most now is for Japan to restore comprehensive economic management. A tax hike is only part of that.
Without a strategy for growth, an effort to reduce government spending, and a policy to stop deflation, a tax hike will not solve the problem. Indeed, some economists fear that a fiscal crisis could erupt even after a tax hike is passed.
Once that happens, the impact on neighboring countries - and on the world economy - will be huge compared to the current European problem. After all, Japan remains the world's second largest economy, accounting for about one-third of Asia's GDP, and 8 percent of global output, whereas the GDP share of Greece in the EU is about 3 percent.
(The author was Japan's Minister of Economics, Minister of Financial Reform, and Minister of Internal Affairs and Communications. He is now director of the Global Security Research Institute at Keio University, Tokyo. The views are his own. Shanghai Daily condensed the article. Copyright: Project Syndicate, 2010. www.project-syndicate.org)
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