Japan could face day of reckoning if tax plans fail: Moody's

Don't understand why credit rating company is suggesting consumption tax hike? i thought their job was restricted to issuing credit ratings upward to downward depending on economy stats of that country. it seems they have wider role to play and are part of sovereign country's policy making as well (?!)

I do not think Moody's should be giving policy advice to any government. Just assess risks and assign a rating. Besides, they are wasting their time to even think that stupid government officials presiding over huge budget deficits year after year are even capable of taking any constructive advice.

The country needs to bite the bullet and start fixing public finances driven by swelling welfare costs..

Huh? On JT today is a story how Japan spends THE LEAST on healthcare of major countries.

Japan's revenues are wasted on trillion-dollar bank bailouts, financing the greedy construction industry to build bridges to nowhere and throwing taxpayers' money at vested industrial interests like RIKEN's ill-fated supercomputer project.

Helping sick people is NOT a waste of money. Moody's is the brilliant firm that failed to spot the onset of the world's worst economic meltdown in modern history. Not only are they incompetent, but all of their prescriptions are aimed at benefiting their corporate billionaire clients.

Brown envelope time.... now what was Moodys address again?

Moody's, Standard & Poors and their other rating agency pals were the same people handing out 5 star ratings to the bogus products being sold by Wall Street prior to the financial meltdown. They have little or no credibility and are in no position to be telling others what to do....

Yes but raising taxes then starts to stangle the already heavily taxed to death... Bottom line is... Japan is in trouble.... low birth rates and an aging population that grows very very old.... not to mention suicides killing off young people that are so needed in Japan as it is.... and again... Japan does not like foreigners flooding in to help out puts Japan in a pickle coming very very soon

They have little or no credibility and are in no position to be telling others what to do....

Nonsense, and many Japanese economists have said the same thing Moody's is. Go ahead and keep burying your folks in the sand and pretending its OK for Japan to continue to borrowing more than it is taking in in taxes. We'll see who has "no credibility".

typo. should read "burying your head in the sand folks"

A few points.

1) Moody's rates countries/companies just like FICO rates people. It's based on debt and income. For a country, taxes are like income. So Moody's telling Japan to raise taxes to pay down debt is like some FICO rep tell an individual to make more money and pay down their credit cards.

2) The majority of Japanese bond holders are Japanese. Generally accepted as the most passive people on the planet when it comes to negotiating for better deals. I don't see them demanding higher interest rates any time soon.

3) The biggest threat to Japan's financial future is when they start having to sell bonds on the foreign market. Domestic bond purchases are directly related to savings rates. But since savings are quickly drying up, the J-government is going to have to find some new customers for their debt. Especially when retired folk start cashing in their savings, which will force the govt to swap bonds.

4) Raising taxes may or may not increase government revenues. Sometimes they do, but some times they kill the economy so much the revenues are actually less, even though the tax rates are higher. Japan had better figure out other ways to increase revenue.

5) None of this will likely be worked out, and Japan will revert to a subsistence, agrarian economy in fifty years, in which case, English teachers will be paid in rice, and have to live in non air conditioned shacks. But the girls will still be hot, and plenty will come to teach and eat rice.

Increasing taxes does NOT lead to economic growth, or lower deficits. Doubling the consumption tax is not even a short-term solution, and will only cause long-term pain. Europe has had high sales taxes for decades, and look at the shape their in.

First, a tax hike will force people to cut costs by cutting purchases. This will hurt businesses, big and small,in the form of less sales, and increased operating costs.

The government, at all levels, should reign in spending. An earlier post mentioned bailouts, and construction projects, most of which are a colossal waste of taxpayer dollars (like the project in Setagaya).

Support, and foster entrepreneurship in Japan by giving tax breaks to start-ups, and cutting red tape. The rule of big companies has to come end, and small business must thrive.

Cut taxes on income, especially if the sales tax is going to double. This will allow individuals and families to keep more of their money for investment, savings, and discretionary spending. Money in the economy is better than money in government coffers.

Japan is in a good position in that its debt is owed to Japanese people. Putting the breaks on the economy, and cutting into their hard-earned income will not make them more patient.

The last thing an economy in recession needs is a tax hike.

I know that many people are emotionally against raising taxes, but realistically I don't know how the heck Japan can repay its debts without raising taxes. Is Japan just going to default? I don't know, but things aren't looking good.

Retirees and others living on fixed incomes will bear the brunt of the consumption tax increase, so give them a break and eliminate the tax on two key essentials: food and rents. I don't want that nice old obaasan living next door to have to spend her final years eating cat food.

I am happy with seeing all the knowledgeable peoples thoughts above. Pretty cool for JT.

Moody should bug out.

If they had any sorts of brains and give an opinion about a consumption tax increase, then they should have suggested a VAT tax. No tax of food. No tax on school items. No tax on baby needs. No tax on medicines etc etc etc.

They are more stupid than Noda and his lies

JBinJapan, very well said! Moody's, along with the others of their ilk, have been consistent in only one respect, being consistently wrong. But the main reason is their admiration of Keynesian economics.

Those clocks are great, zichi. Hard to keep up with the figures. Which one is moving fastest, I wonder? Oz looks cheap.

Moody's should confine themselves to what they are good at.

Japan's economic problems are related "political" problems with most politicians "out of touch" with the "whole picture" from the individual family levels to the international level. Sadly too many are more concerned with "personal positioning" for "power and image" rather than common national good or benefit. That is what seem to happen when a government becomes too big as with the USA which Japan was modeled after.

However, the tax problem is a fundamental problem that needs to resolved regardless of what "credit rating" is internationally. The problem is as stated above by many of you, related to "spending". That is directly related to the "people" taking more and more in unearned benefits and the government spending more and more outside of the country. So the solution may be in "controlling and rolling in the spending" rather than in increasing taxation.

That means the entire population must be willing to rely on their own funds to pay for the benefits they are currently getting or want to get in the future. That is difficult to imagine in current Japan.

As stated in the previous related articles, increase in oustanding amount of JGB amounts to nothing more than a net sum zero game on the Japan's balance sheet.

Japan is facing a deflationary spiral in which the largest of the bond holders (financial institutions) are sitting with loads of cash with nowhere else to go except buying JGB. On the individual perspective, the pension takers are not spending like they should but choose to "save" which in turn maintains this spiral. In lamen terms, it's like a bunch of people purchasing prepaid Starbucks card who choose not to use them.

In addition, Japan has the largest net external assets, meaning more countries owe Japan than Japan owes other countries.

Furthermore, since these debts are yen denominated instruments, BOJ could simply issue more yen to pay off these debts, if necessary. Might as well just to put some inflationary measures as well as silencing these fear mongers.

Nigelboy has a great point – most people do not understand that Japan’s increasing public debt (JGB) is actually CAUSED by the corresponding increasing in the surpluses generated by its private sector (mathematically the sum of the three sectors – public, private and foreign balances out). It’s no coincidence that Japan’s public sector deficit of 7% of GDP per year is exactly the same as its private sector surplus – of 7% of GDP – it’s analogous to the flip side of the same coin.

So ironically, the constantly fear mongered “debt problem” is caused by Japan having too much money – investing in JGB is basically free money for J- mega banks, as they have over a trillion dollars of excess deposits burning a hole in their pockets – because the corporate and household sectors are sitting on record cash reserves and hence they have relatively low demand for loans.

What's really impressive about Japan is its EXTRAORDINARLY ROBUST private sector balance sheet -- yes, its government is a mess, yet its private sector has never been more flush with cash.

These articles are informative:

corporate Japan is sitting on a 2.4 trillion $ cash pile:

http://www.bloomberg.com/news/2011-05-30/sony-leads-japan-inc-circling-takeovers-with-2-4-trillion-cash-real-m-a.html

Japanese households have more than 10 trillion $ in cash:

http://www.bloomberg.com/news/2011-03-23/japanese-households-record-cash-holdings-may-be-defense-from-quake-woes.html

nigelboy and 1stand -- what are you talking about? So what if Japanese companies and the public are sitting on piles of cash? All that means is that the government can continue borrowing more -- for a finite time. Forget the balance sheet, let's look at the income statement. Which says Japan has to borrow more than it takes in in taxes, and even with the low interest rates, it has to spend more on servicing the debt than on social programs. And they have spent all this money -- total debt of over two years of GDP -- to stimulate ZERO growth and deflation. Moody's is rightly saying that Japan cannot borrow its way out of their problems and must bite-the-bullet and do what is necessary to increase revenue.

Europe has steadily increased its VAT consumption tax over the years, and Japan has looked enviously at all that raised tax.

Where has it taken Europe? Where will a rise in consumption tax take Japan? It started at 3%, then 5%. A year or two down the road and they will, like Europe, want to increase it again, and again, and again... a familiar story?

Is it really the right thing to do? In Europe high VAT has led to widescale under-the-counter cash transactions, ie, no records/receipts = no tax. Will Japan be able to stay accountable = taxable?

Anyone remember the days when Japan Inc was going to buy/run/rule the world?

A nation’s account is calculated as the balance of:

Public sector + foreign sector = private sector

For Japan, the public sector is in deficit, but the foreign sector and the private sector are all in surplus; during the bubble era, the public sector and the foreign sector was in surplus, but the private sector (corporate) was in deficit. After the bubble burst, Japanese corporate sector went through painful restructurings but ultimately emerged stronger than ever and hence accumulated over 2 trillion $ in cash. Japan is also the world’s largest creditor (and hence the largest exporter of capital) with net international investment position of over 3 trillion $ -- that’s more than China and Germany combined.

That why it’s illogical to say that Japan will run out of savings and cause a debt crisis, when in fact the increase in Japanese government debt is CAUSED by the increase in private sector (household + corporate) savings! Ironically, if the pundits are correct and Japan does run out of savings, Japanese government debt will decrease as a result of the private sector deficit.

However, I do understand why this web site constantly beats the doom and gloom drum – web media is a competitive business, and the name of the game is ADVERTISING. To attract advertisers, JT needs web clicks, and to do that, something like “the structural surplus of excess savings in Japan’s corporate and household sectors and its influence on the JGB market” won’t do the job; sensational titles such as “Japan will collapse soon, the sky is falling, hoard gold” makes much more business sense.

****>>Don't understand why credit rating company is suggesting consumption tax hike?

@some14some, it is strongly suggested by IMF, G20 and the rest of world.

@JapanGalMay. 04, 2012 - 04:45PM JST Moody should bug out.

Moody should bug out.

Okay, let's make your money worthless as you wish. It is easy.

@Nigelboy,

Furthermore, since these debts are yen denominated instruments, BOJ could simply issue more yen to pay off these debts, if necessary

Issuing more Japan Bonds? Oh noooo... You are digging grave deeper and deeper. You do not seem to understand economic theory. One of days, Japan is not afraid to say "default" meaning, all your money savings will be worthless. The government cannot pay back to Japanese savers. So what would they do? Close all financial institutions without any warning and go to a New Yen. Your savings worth less or no value. Is that what you are talking about:? The world financial institutions are already predicting this to happen while Japanese are still in denial. Very interesting, huh?

BOJ of Japan can use powerful unique one-time write-off strategy because of very strong Yen. BOJ to print Yen 500 trillion, and buy Yen 500 trillion JGBs from MOF and write off the debts completely in one stroke. And pass a law that it cannot do this kind of write-off for another 30 years. Results:

National debts will immediately be reduced by 50%. Yen will weaken sharply, maybe from 79 to 110 against the US dollar. Deflation will be defeated. Exporters will become very competitive in global markets. Nikkei & property market will recover.

BOJ of Japan can use powerful unique one-time write-off strategy because of very strong Yen. BOJ to print Yen 500 trillion

@mr_jgb,, yep, you are making your money to a worthless piece of paper. Your savings will worth nothing! There will be a flood of hungry Japanese people on the street. If that's what you want to do, it is fine with me.

Deflation will be defeated.

@mr_jgb

Who was in charge of BOJ 15 years ago? He made a big boo-boo for Japan to go into deflation spiral? Please let me know who that was if you recall. Thanks.

Also who was a PM of Japan 15 years ago? This guy"s fiscal policy was also a big boo-boo.

From their big mistakes in the past, Japan still suffers as of today.

Yeheyyyyyy you're all right.... MOODY is plain BS.