Noda’s ‘Urgent’ Task Is Tax Rise as Japan Debt Load Swells

Noda’s ‘Urgent’ Task Is Tax Rise as Japan Debt Load Swells

Dec 26 (Bloomberg) — Prime Minister Yoshihiko Noda’s next task is securing support for a higher sales tax after Japan’s budget for the next fiscal year showed a record dependence on borrowing to fund government spending.

The government will sell 44.2 trillion yen ($566 billion) of new bonds to fund 90.3 trillion yen of spending, raising the budget’s reliance on debt to an unprecedented 49 percent, a plan approved by the Cabinet in Tokyo on Dec. 24 showed. While spending will decrease for the first time in six years, Noda will delay funding the nation’s pension fund and will create a separate budget account to pay for earthquake reconstruction.

An aging population and two decades of low growth after an asset bubble popped in the early 1990s have left Japan with debt projected at a record 1 quadrillion yen this fiscal year. Noda faces opposition from the public and within his Democratic Party of Japan to increasing the levy even as Standard & Poor’s considers further cutting the nation’s credit rating, reduced in January to AA-.

“The government should hike the consumption tax rate and cut social security spending as soon as possible,” said Masaaki Kanno, chief economist at JPMorgan Chase & Co. and a former Bank of Japan official. “This is urgent. We do not have the luxury of losing any more time.”

About 53 percent of voters oppose an increase, with a third saying Noda should call an election before such legislation, news service Jiji Press said last week, citing a Dec. 9-12 survey of 2,000 people. The DPJ lost its majority in the upper house of the parliament last year after then-Prime Minister Naoto Kan campaigned on a pledge to cut spending and raise the 5 percent sales tax.

‘Constituents’ Purses’

DPJ lawmakers with weak electoral majorities may be “tempted to vote for their constituents’ purses” by opposing an increase, said Jun Okumura, a former Japanese trade ministry official and a consultant at the Eurasia Group risk consulting firm in Tokyo.

While Japan’s gross domestic product grew an annualized 5.6 percent in the three months ended September as demand picked up after the March 11 earthquake, the pace will probably slow. The median estimate of 11 economists surveyed by Bloomberg News is for growth of 0.42 percent this quarter. Of the 10 polled this month, five predict GDP will shrink.

Gains in the yen are weighing on growth by eroding exporters’ profits, a factor cited by Moody’s Investors Service in cutting the rating outlook for Toyota Motor Corp. on Dec. 22. Europe’s debt crisis is reducing demand for the nation’s products, while earthquake reconstruction costs will swell spending. The yen traded at 78.09 per dollar on Dec. 23 after touching a post-World War II high of 75.35 on Oct. 31.

Sales Tax Plan

Noda’s party will today present a plan for raising the sales tax, lawmaker Shinichiro Furumoto said last week. The ruling coalition plans to raise the rate to 8 percent in October 2013 and 10 percent in 2015, Kyodo News reported Dec. 21, citing government sources.

The International Monetary Fund says a gradual increase to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.” Martin Schulz, a senior economist at Fujitsu Research Institute in Tokyo, advocates boosting the tax to “at least” 20 percent.

‘Not Normal Times’

Former DPJ leader Ichiro Ozawa and Shizuka Kamei, the head of the People’s New Party, a coalition partner, aim to head off the move. Kamei said this month that “we’re not in normal times, and it’s folly to be playing around with the tax system.”

So far, Japan’s debt burden hasn’t impeded the government’s ability to borrow, with 10-year bond yields poised to close below 1 percent for the first year since 2002.

Noda’s spending plan for the year starting April includes a 3.8 trillion yen special account for reconstruction spending.

Besides the consumption tax, a government panel proposes increasing the highest personal income tax rate to 45 percent from 40 percent by the middle of this decade.

“Japan’s government is proposing the right remedies for the country’s fiscal debt problems, but the speed is too slow and we can’t be confident that the measures will actually be implemented,” said Hitoshi Suzuki, a senior researcher of Daiwa Institute of Research in Tokyo.

Tokyo-based Ratings & Investment Information Inc. cut Japan’s rating for the first time on Dec. 21. S&P has a negative outlook for the nation and said last month that a downgrade may be getting closer after insufficient progress in tackling a public debt burden that is the world’s biggest.

Japan’s structural deficit “is completely out of whack because of increasing social security demands and costs,” Schulz of Fujitsu said last week. “If the government remains lazy in terms of hiking the consumption tax rate, it’s just a matter of time before the very obedient Japanese investors are no longer happy to finance the deficit.

This entry was posted in Government Spending, Japan. Bookmark the permalink.

34 Responses to Noda’s ‘Urgent’ Task Is Tax Rise as Japan Debt Load Swells

  1. Sancho Panza says:

    To Warren and other contributors,

    What can you offer in the way of what the next ten years will look like for Japan? I have read 7DIF and a good deal of other MMT material, but I have trouble applying it to thinking about Japan’s future, because their starting point is so different from the other cases we read about, ie US, Euro area, etc.

    As the private sectors stops saving, and starts dis-saving, does that mean the government will naturally run a surplus? As they repatriate assets from overseas back into yen, does that run the yen exchange rate up? It seems this may already be happening, yes?

    Looking at the sectoral balances, it seems that as the ratio of workers to retirees goes down, then they have to have some domestic inflation, and that they will also become net importers. But wow, could that really happen?

    Any thoughts are appreciated, I have struggled to apply MMT to better analyze the situation there.

    Reply

    Adam (ak) Reply:

    @Sancho Panza, If the private sector starts net dissaving, the stock of bank credit doesn’t change and the current account balance remains in surplus then the government will have to go to surplus or there is a risk of aggregate demand exceeding the productive capacities. To some extent the surplus may occur naturally through “automatic stabilisers”. But these conditions are rather unlikely even in Japan. Further discussion is on Bill Mitchell’s blog.

    I don’t think the Japanese will really implement austerity, they may just pay some lip service. If the Wall Street overlords insist on the Japs committing an assisted economic seppuku, they risk losing an unsinkable aircraft carrier.

    Reply

  2. Unforgiven says:

    @Alex,

    Time for Alex to read 7DIF again.

    Reply

  3. Alex says:

    A fiat ponzi scheme collapses in one of two ways:

    1. Hyper inflation

    2. Hyper deflation

    Reply

    Unforgiven Reply:

    @Alex,

    3. Impertinent Trolls who who are ignorant of the mandatory readings.

    4. Citizens who don’t know how their own currency works and so listen to the likes of Ron Paul.

    Reply

    WARREN MOSLER Reply:

    or, fiscal policy can be somewhere in the middle and sustain full employment continuously.

    don’t forget to read the 7 dif

    Reply

  4. Alex says:

    MMT is just another way of saying that a ponzi scheme can continue as long as more people and money are brought in so that the people at the top (central bankers) can make off like bandits.

    In reality all ponzi schemes collapse and Japan is part of a global inter-connected ponzi scheme.

    The way to riches in the modern world is to either steal money off the top of the ponzi scheme (calling yourself a wall-street investor) or to time the collapse of ponzi schemes in which case the wall-street attack dogs do their best to have you locked up for insider trading.

    Reply

  5. roger erickson says:

    Meanwhile, on the other side of the ponds, back where Japan has outsourced many of it’s retirement communities, this just in.

    beggars belief – Spain’s “top priority is to cut its unemployment rate”

    highest in the industrial world at 21.5 percent.
    so, they’ll try to “slash Spain’s deficit by 16.5 billion ($21.7 billion) in 2012″
    http://www.google.com/hostednews/afp/article/ALeqM5iB8lXjJ9BEg2ONH87Pbw0Pfsx0PQ?docId=CNG.78d94d2db7a9c25c63848ffe36b59242.741

    no wonder the headline says “Spain economy shrinks, outlook bleak: minister”

    they should up update that to “Spain’s group intelligence shrinks, policy response bleak” [Translation: emigrate]

    Reply

    jonf Reply:

    @roger erickson, Insanity. More cuts on top of the unemployment. It is a wonder there is not a revolution there.

    Reply

    WARREN MOSLER Reply:

    revolution? in Europe? any history of that?

    :(

    Reply

    Walter Reply:

    @WARREN MOSLER, Wasn’t it in France where they invented the ‘guillotine’ to chop off heads of the established royals and noblesse?

    roger erickson Reply:

    @WARREN MOSLER,

    Off with their Feds! :)

  6. jonf says:

    Well, if the IMF and Lagarde agee to this I’m tempted to stand up and snap to attention and click my heels. I mean those folks ain’t never wrong, er right. After two decades of low GDP all they can think to do is more austerity. That has got to be the IMF input?

    What is a quadrillion anyway? Maybe I don’t want to know.

    Reply

  7. pebird says:

    First news story I’ve recall with reference to “quadrillion”. Looking forward to more!

    Reply

  8. paul says:

    Maybe everyone on the face of the earth should become a bank. Then we all could create our own fractional reserve money… send it to our branches in London and Hypothocate it. That should create some demand.

    Why can’t we all be like Corzine?

    Reply

    pebird Reply:

    @paul, Let’s start by each of us incorporating ourselves, then our personal corporation can purchase our personal debt to shield ourselves from any liability. No conflict of interest there.

    Reply

    WARREN MOSLER Reply:

    how about if we all have a casino in our homes and get rich that way?

    Reply

    roger erickson Reply:

    @WARREN MOSLER, And then we all hire our own mobsters, for “protection”.

    Only winners would be those with a monopoly on “certified” cards, tables & slot machines.

    Actually, that vaguely familiar.

    Reply

  9. rodney says:

    Has anyone tried to find any correlation between austrian economics and mental illness.

    Reply

    roger erickson Reply:

    @rodney, Look in the “Right Wing” section. It’s a self-documenting study that researchers can’t even keep up with. How much can you read & observe?

    Julius Caesar in/famously said: “It’s better to create than to learn. Creating is the essence of living.” However, J was slow to learn the concept of tolerance limits. You have to learn to discriminate creating from creating self-destruction. There’s always more than one concept to mesh asynchronously. Otherwise, complexity would be simplicity.

    Reply

    WARREN MOSLER Reply:

    back then when a senator stabbed you in the back he really stabbed you in the back

    Reply

  10. hamish says:

    It’s weird that after 20 years you would think they would have learnt their own lesson.

    Reply

    roger erickson Reply:

    @hamish, Harvard propaganda works. If they want their kids to get faculty jobs at Harvard, and if they want to get invited to all the right conferences (maybe even a cushy IMF or WB job) then they have to toe the propaganda line.

    After all, the post WWII public initiative glow is so immense, there’s no need to even imagine it could be depleted. That can only happen to the Grand Banks, right?

    Reply

    WARREN MOSLER Reply:

    agreed. they continue to fear becoming the next greece. they believe that nonsense that the only thing between them and fiscal ‘disaster’
    is that their jgb’s are largely domestically owned.

    Reply

    Walter Reply:

    @WARREN MOSLER, Sometimes I get the impression the Japanese play it pretty smart. To the outside world they keep up they do all to prevent ‘mainstream’ problems. In the meantime they issue debt as needed and desired.

    Reply

    roger erickson Reply:

    @Walter, They’re acting way too slowly this time, compared to decades past. Japan has it’s own version of creeping austerity, with record unemployment (for them) and record numbers of homeless pensioners.

  11. Alex says:

    but Mosler claims Japan cannot go bankrupt because they can print as much Yen as they like?

    They can either print until the Yen collapses in a hyper inflationary spiral or they can print until the Yen collapses in a hyper deflationary spiral.

    Those are the two outcome of fake fiat currency systems.

    Vote Ron Paul.

    Reply

    Shaun Hingston Reply:

    @Alex,

    Your one of those ‘sound money’ idiots, yea? Sound Money still has fiat, except more yellow stuff is needed before more paper, yea? So before more fiat can be made people have to dig holes and find yellow stuff. It is exactly the same as the current system except for this stupid detail. Why should the financial system be held hostage to holes, hole-diggers and yellow-stuff holders? The amount of holes society can dig is indicative of how much fiat should be circulating? The amount of dirt society can process is indicates how much fiat we can create?? Right…..

    Vote Ron Paul for a financial system held hostage by hole-diggers and dirt-processors.

    Reply

    Rodger Malcolm Mitchell Reply:

    @Alex, Has anyone noticed that the debt-nuts now have transitioned from mere inflation-worry to hyper-inflation-worry. They see hyper-inflation around every corner.

    Unemployment? We have it but who cares? Recession? We’re headed for it, but who cares? Hunger? Lots of it, but who cares? No health insurance? Millions burdened, but who cares? The “real” worry is hyper-inflation, which the U.S. never has had in its 235 year history.

    And as for the gold standard, that’s when we had the Great Depression. But who cares? Not the debt nuts.

    Reply

    WARREN MOSLER Reply:

    when was chicken little written? been at least that long?

    Reply

    Unforgiven Reply:

    @Alex,

    Read 7DIF again. It SAYS what the limitation on spending is. It’s right in there, Alex.

    Oh, and how about that inflation rate in Japan? With a debt/GDP like that, I’m sure the bond vigilantes are just chomping at the bit.

    Reply

    WARREN MOSLER Reply:

    so ‘printing’ can cause deflation?
    whatever…

    read the 7 dif thanks.

    and don’t vote for anyone who wants to balance the federal budget, unless you are subversive

    Reply

    macrosam Reply:

    @Alex,

    picardfacepalm.gif

    Reply

  12. Jonf says:

    I love it. More taxes. Investors won’t finance the debt. Guess that means bankruptcy, right. Did someone steal their printing presses too?

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>