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Japan runs on different rules

The Japanese government has approved a record stimulus package, including cash handouts and aid to ailing businesses, as it aims to help the economy out of the doldrums worsened by Covid-19.

| 6 min read

When you read the words of Japan’s Treasury it sounds as if they belong to the same financial world as the rest of us. The Treasury warns that if Japan continues to borrow large sums to finance its social-welfare expenditures there will be “increased risk, such as a deterioration of confidence in government bonds and the national currency”.

The Treasury has been seeking progressive increases in consumption tax to raise more money. It would like to see reform of the ever-rising social security budget, with plans to buy more generic drugs and to shift more elderly people out of hospitals into home care. The incoming Prime Minister Kishida does not agree. He has decided to go for a major boost to spending unmatched by tax rises in an effort to lift the sluggish growth rate and promote faster recovery from the damage done by Covid-19 lockdowns.

Special case

The prime minister is in line with his predecessors’ views. He is assuming, as they did, that Japan is a special case. It has proved able to borrow huge sums of money to pay for public spending whilst keeping the interest charged on Japanese state debt well down. The helpful central bank buys as many government bonds as are needed to keep the rate of interest on ten-year debt down to zero, with negative rates for shorter borrowings.

Where such action in a Latin American country would soon lead to national bankruptcy and a visit to the IMF, Japan has been able to keep the confidence of markets. The policy has not generated inflation in the way it usually does elsewhere. Japan’s ageing and shrinking population does not go on a spending spree or a borrowing binge themselves. State financing proves very stable, as the state buys up such a large amount of its own debt.

Japan is not greatly indebted to foreigners, which could cause more strains to emerge. The Japanese authorities can set the interest rate where they will and can decide on the balance of advantage between the many people benefitting from the extra public spending, and the low returns earned by Japanese savers on their holdings of government bonds.

The newspapers have been briefed that the spending package will be substantial, at 55.7 trillion yen, or $488bn. It will be financed by extra borrowing. It is not all new money. The borrowing level was already very high, with the state covering just 57 trillion yen from taxation out of its 106 trillion yen total recorded in the Treasury’s guide to the General fund . There is a substantial deficit of 20.4 trillion yen created by raising less tax than public spending, and a further deficit from having to repay debt and pay interest on debt.

  • 55.7 Tr yen spending package

Challenging demographics

The demographics of Japan are one of the main reasons for this Japanese exceptionalism in its public finances. An ageing society spends less than a younger one, as so many people have all the main items they need for their lives. Not enough young people acquire their own home or set themselves up for family life.

Elderly people unable to earn more from work are often cautious with their money. Very low interest rates mean the savers amongst them feel they need more savings to be secure. The demographics also make the balance between spending and tax revenues worse for the state, with the last few years of life needing maximum support from the health system and maybe long-term care. Japan does not traditionally invite in a large number of migrants who are more likely in western societies to be younger and have more spending needs.

The planned package we are told is designed to help families. The offer of vouchers and cash is pitched to encourage more spending and may provide some boost. Every child under 18 in a family will attract a payment of 100,000 yen up to an income cut off. Many small businesses are in line for 2.5 million yen. The idea is to get more cash into the hands of those who might spend it to boost activity.

The government also hopes there will be an additional boost of 22.2 trillion yen from the private sector. It would also be good if business investment picks up more. Further assistance to company cashflows could help there. Japan has been economically damaged by the pandemic. People were reluctant to take up vaccines and the government followed a very cautious strategy of lockdown. As a result, it has had fewer cases and deaths than the US or Europe. It now needs to shake off some of the economic scarring.

The package is large and should be helpful. It is unlikely to trigger a fast inflation, though even Japan will get some inflation as a result. The decision to go for some pay rises for nurses and care workers above the Japanese norm, and the impact of rising energy prices on a country which is dependent on imports, will be picked up in the inflation index. The package may want to help boost Japan’s technology base, to provide more microprocessor capacity and advance Japanese industry.

Stock markets may well continue to welcome it. There will be some concern about the continuing dependence on creating money to buy up bonds. This time it would be good if the government keeps a promise not to move too rapidly to impose a higher consumption tax, which has twice before dented growth.

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Japan runs on different rules

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