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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Japan Vows to Push Fiscal Reform after S&P Downgrade

Posted by WARREN MOSLER on January 28th, 2011

The one nation that was at least sort of moving towards at least some proactive fiscal expansion may no longer be doing so.

Following through with this would make the yen fundamentally stronger (harder to get).

I singled out David Beers of S and P for criticism only because he does understand the difference between ability to pay and willingness to pay with regard to currency issuers vs currency users.

And Prime Minister Kan’s remarks couldn’t be more out of paradigm:

Japan Vows to Push Fiscal Reform after S&P Downgrade

 
Japanese leaders vowed on Friday to push ahead with tax reforms needed to rein in bulging public debt, but doubts persisted over whether the government could succeed in the face of a divided parliament.

 
Rating agency Standard and Poor’s cut Japan’s long-term debt rating on Thursday for the first time since 2002 while the International Monetary Fund had harsh words for Washington and Tokyo, saying they need to act urgently to cut their deficits.

 
Prime Minister Naoto Kan has made tax and social security reform, including a future rise in the 5 percent sales tax, a priority given the rising costs of Japan’s fast-aging society and a public debt that is the biggest among advanced nations.

 
“The important thing is to maintain fiscal discipline and ensure market confidence in Japan’s public finances,” Kan, who took over in June as Japan’s fifth premier since 2006, told parliament’s upper house.

 
But with Kan’s voter support sagging at around 30 percent, opposition parties which control the upper house have shown little inclination to compromise — something S&P highlighted when explaining its reasons for the downgrade.

 
Kan’s finance minister echoed his stance, saying the government must show its commitment to fiscal discipline, while Deputy Chief Cabinet Secretary Hirohisa Fujii said the government would take S&P’s criticism to heart.

 
“The Japanese government must humbly take the rating by a leading world ratings agency and further deepen its awareness of the importance of restoring fiscal health,” Fujii, a former finance minister, told a news conference.

 
Dropping the Ball?

 
Analysts had said the S&P downgrade could bolster Kan’s campaign for fiscal reform, but the premier initially did little to sell his case, telling reporters after the downgrade was announced that he was “not very familiar with the matter”.

11 Responses to “Japan Vows to Push Fiscal Reform after S&P Downgrade”

  1. Tim Says:

    How does a country know it has more debt than they can service?

    I understand default is never necessary with a sovereign currency, but can you reach a point of no return?

    -Tim

    Reply

    Neil Wilson Reply:

    You can always replace interest earning paper with non-interest earning paper.

    Because it is not ‘debt’. They are really nothing more than tradeable government issued saving certificates.

    Reply

    ESM Reply:

    Well, I would say that it is a debt of the government. It’s just that currency is a debt of the government too. And the only way that such debt can ultimately be redeemed is as a credit against taxes or fees owed to the government (or against any goods and services the government has for sale).

    As for the question about going too far — yes, a fiat currency sovereign can still get itself into trouble and suffer a death spiral of currency depreciation. I think this could only really happen if many of the obligations of the government rise in inverse proportion to the fall in the currency or in proportion to inflation. And furthermore, the tax burden does not rise in inverse proportion to the fall in the currency.

    So, for example, having significant obligations denominated in a foreign currency or in a commodity can be a problem. Paying interest rates tied to inflation (e.g. CER-linked notes in Argentina, TIPS in US) can be a problem. And paying pension obligations with a cost of living adjustment can be a problem.

    The US is not close to this situation at all. Because of our highly progressive tax code (not just the tax rates, but the generous deductions as well), the nominal tax burden will rise much faster than government obligations if the currency depreciates or if inflation rises.

    Reply

    roger erickson Reply:

    > currency is a debt of the government

    Ok, but government is a coordination burden, or debt, on it’s population.

    That’s only a worry if a population can ever run out of initiative. End of story.

    People really will do anything in their power to avoid thinking. It’s a known fact.
    Nevertheless, it’s necessary, at least once a day, once you get over the fear of it.
    It’s in all the physics, physiology & evolution manuals: “Don’t stop doing #1.”

    Reply

    Tom Hickey Reply:

    Tim, the current argument among “sound” money folks is that the situation becomes unsustainable when debt service rises about of certain % of GDP, since then the bond vigilantes freak out and drive up interest rates, making future government borrowing more expensive. Their view is that continued “printing” of money for debt service at that point will result in undermining confidence in the currency, and it will severely depreciate as people exchange what they perceive as becoming increasingly worthless for tangible assets or harder currencies. This has been the constant criticism of “Keynesian” policy for decades, with a lot of references to Weimar and Zimbabwe, and how historically no fiat currency has ever survived.

    The MMT answer is: Really? :)

    There is no convincing these folks, who hang out at places like Zero Hedge or Mish’s, for example. They have made-up minds that only function one-dimensionally.

    Reply

    WARREN MOSLER Reply:

    servicing debt is a matter of crediting reserve accounts at the Fed.
    only takes one grandchild to make the entries

    see: http://www.moslereconomics.com/?p=8662/

    Reply

    roger erickson Reply:

    now that it’s computerized, all it takes is an Android app!

    Reply

    Tom Hickey Reply:

    And when AI kicks in, we can all go to the beach. :)

    Tim Reply:

    New question:

    If a country pays off 100% of the debt via taxing the citizens, is there any fiat $ left in the economy?

    I am thinking fractional reserve banking keeps $ in the economy, but am unsure.

    Thanks again for the helpful answers.

    -Tim

    Reply

    Ramanan Reply:

    Yes theoretically possible for the Government sector to be a creditor of other sectors.

    Lets imagine a nation which imports less and whose export sector is doing good. Further assume that the net private saving is positive, and that the current account surplus is higher. The government keeps running surpluses. The surpluses will lead to a reduction of government debt and its possible that it is retired.

  2. roger erickson Says:

    > Deputy Chief Cabinet Secretary Hirohisa Fujii said the government would take S&P’s criticism to heart.
    > “The Japanese government must humbly take the rating by a leading world ratings agency and further
    > deepen its awareness of the importance of restoring fiscal health,” Fujii, a former finance minister, told
    > a news conference.

    Wow. Really changed their tune since 1998 & 2000.

    Reply

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