Japan’s public debt: Don’t mention the debt 3.0 out of 5 based on 1 votes.

TO REVIVE Japan’s economy Shinzo Abe, its prime minister, has loosed three arrows. Temporary fiscal stimulus, monetary easing and structural reform together make up the strategy known as “Abenomics”. But many reckon there needs to be a fourth dart in the quiver: fiscal consolidation over the longer term to tackle the country’s vast public debt, which is expected to approach 240% of GDP next year (see chart).

Mr Abe’s party, the Liberal Democratic Party of Japan (LDP), last year co-operated with its main rival, the Democratic Party of Japan (DPJ), to pass a bill to raise the consumption tax from 5% to 8% in April 2014 and up to 10% in October 2015. For Yoshihiko Noda, the DPJ prime minister at the time, the bill represented the end of a crusade by his party to get Japan back on fiscal track. The extra consumption-tax revenue of {Yen}13.5 trillion ($14 billion) meant that a goal set in 2010 of halving the primary budget deficit (ie, before interest payments) to 3.2% of GDP by 2015 looked achievable. This modest target would not reduce Japan’s debt, but the bill was at least a small step in the right direction.

Then came Abenomics. The first arrow means spending an extra {Yen}10.3 trillion of stimulus on areas such as public works, reconstruction of the Tohoku region hit by the earthquake and tsunami in 2011, and other projects. This spending makes the debt problem worse in the immediate future and the 3.2% target well-nigh impossible to achieve. On the other hand it should boost economic activity, which would both lift tax revenues and make it easier to raise the consumption tax.

The tax has long been contentious. Its introduction in 1989 marked the peak of Japan’s stockmarket and property bubbles. When raised in 1997 it similarly seemed to start a downturn. Many around Mr Abe now argue that any austerity could derail his growth programme. In March the prime minister told a parliamentary committee that he was not obliged to implement the consumption-tax hike, and that he would decide after seeing second-quarter GDP figures. That unnerves many. “We must show that we are determined to restore financial health,” protests Seiji Maehara, a former economics and fiscal-affairs minister of the DPJ. Raising the level of the tax is Japan’s last chance to get its debt under control, says an official at the Ministry of Finance.

Mr Abe may calculate, as many have before him, that there is no imminent threat of a debt crisis. Yields on Japanese government bonds (JGBs) are as low as ever. The market for JGBs is still dominated by loyal Japanese savers and institutions rather than by flighty foreigners who would demand higher yields. And there is a big new buyer in the form of the Bank of Japan (BoJ). As part of its effort to banish deflation, the central bank announced in April that it will buy around 70% of annual JGB issuance. The BoJ has made it clear that its intention is not to “monetise” government debt but its purchases do provide a window for the government to promote growth without worrying too much about the bond market.

At some point, however, action will be needed. At over {Yen}1,000 trillion, the sheer size of the debt weighs ever more heavily. The cost of servicing it eats up over half of tax revenues. The high cost of importing energy while nearly all Japan’s nuclear plants are idled is also leading to worries that the current account could eventually slide into deficit, forcing the government to rely more on foreign money. On April 23rd the OECD, a think-tank, warned that reducing debt has to be Japan’s priority.

Japanese savers’ ability to step in and reliably soak up new debt each year is expected to start dwindling in the nearish future. An ageing population means a falling savings rate as people retire and draw down income. Growing corporate cash surpluses, which get recycled into JGBs via the banks, have until now offset this trend, notes Naohiko Baba, chief economist for Goldman Sachs in Tokyo. But as Japanese firms choose to invest more, company cash balances are set to fall too, he says. (Not everyone worries about this: a counter-argument is that Japan’s government has to run a big deficit only because Japan’s combined private sector insists on running a big surplus.)

The government’s fiscal-policy council will propose an outline for next year’s budget in June. It is unlikely to contain any big new steps to tackle the debt burden, coming as it does just before a crucial election for the upper house of parliament in July. But if Mr Abe does decide to postpone next year’s modest rise in the consumption tax, even Japanese investors would start to reassess their portfolios, says Mr Baba.

source: http://www.economist.com/news/finance-and-economics/21577080-shinzo-abes-government-looks-likely-disappoint-fiscal-consolidation-dont?fsrc=rss%7Cfec


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