Ex-BOJ official sees little risk of tax hike harming Japan recovery

Maybe it won't trigger a downturn, given that the global economy, led by the US, is amid a recovery. But the tax hike is still an idiotic move for a country with such insufficient demand.

Muto can't see his hand in front of his face. An old fool in clear denial.

If there is insufficient demand, the government could issue more debt and create extra demand though right, JeffLee?

In fact, for those who believe in government boosting demand, I don't know why they don't just call for the issue of a quadtrazillion yen in extra debt, and spend it. Everyone loves Japanese debt. Japan would then be the largest economy on the planet. (Well I suppose it would defeat their purpose of attempting a little fiscal consolidation for a change, but at least the economy would presumably be gangbusters, if it all went to plan.)

@fxgai

"but at least the economy would presumably be gangbusters,"

It has reacted to the stimulus by posting its strongest growth in 3 years (despite a shrinking population). That's not a bad start, I'd say.

Anyway, you seem very concerned, so tell us please exactly how the fiscal debt is damaging the economy. No theories or speculation or "presumably". Just give us some real-world evidence or events, because that's what I cite in defending my position. (Yeah, I'm crazy, I know.)

JeffLee,

It has reacted to the stimulus by posting its strongest growth in 3 years (despite a shrinking population). That's not a bad start, I'd say.

Oh, I wasn't talking about what they've done so far. Indeed I agree the economy has done well since Abenomics started.

I'm suggesting that they could just do even more, say ten or a hundred times more. I don't see why they have to stop where they have, if what they are doing is basically a free lunch.

I imagine some of the economic strength has come from the side-effects of the first arrow (QQE) which are an appreciably weaker yen + a higher stock market, not just the second arrow ("flexible fiscal spending") boost to GDP numbers.

Anyway, you seem very concerned, so tell us please exactly how the fiscal debt is damaging the economy.

I'm concerning myself with a "risk", not something that has already come to pass. This is an important point which seems to be the disconnect between you and I.

To draw a comparison, I pay for life insurance, even though I'm not dead yet.

I know I've said this before, but BOJ governor Kuroda himself has been drawing attention to a need to not play chicken with the financial markets over the size of the fiscal debt, so I'm clearly not the only one worried about such a risk.

Kuroda and I might certainly both be entirely wrong to be worried, but that is not risk management, as events like Fukushima showed us.

I know you like to point to JGB yields being extremely low, but I can't but help think the market might NOT be pricing the credit risk correctly. Stranger things have happened than markets failing to accurately price credit risk, as we know from recent history. The fact that JGBs are held so predominantly by domestics, with less than 10% held by foreigners worries me. If JGBs were so great, why wouldn't foreigners own more of them? What do the Japanese know that the foreigners don't? Or vice versa, are the foreigners keeping their hands off because they don't have some kind of patriotic (?) urges to own JGBs?

Yes this is all speculation. But I don't think the risk is zero. That's all.

"I'm concerning myself with a "risk""

The risks have been cited for many years now, every since Japan dropped its int. rates to zero and flooded the system with liquidity....14 years ago! None of doomsday scenarios have come to pass. None. Did you hear that? None.

"but BOJ governor Kuroda himself has been drawing attention to a need to not play chicken with the financial markets"

The financial markets melted down in 2008 and 1989 due to the reckless actions (playing chicken) committed by the financial industry itself. The govt's fiscal policies had nothing to do with it and its monetary arguable could have been tighter, but it still wasn't the driver. Kuroda, by the way, is an idiot.

History and real events are on my side in this argument. How come compelling can a person be?

" The risks have been cited for many years now, every since Japan dropped its int. rates to zero and flooded the system with liquidity....14 years ago! None of doomsday scenarios have come to pass. None. Did you hear that? None."

Yet.

Patience, boy. That day is coming. As the adage goes, "Bankruptcy comes slowly, then very abruptly". When you look only at the tree in your face, you can't see the forest.

"When you look only at the tree in your face, you can't see the forest."

That's ironic. I'm looking real-world evidence over an extended period. That is indeed the "forest."

"Well I suppose it would defeat their purpose of attempting a little fiscal consolidation for a change"

What does "financial consolidation" mean? I believe the term was coined by Kuroda himself.

Flood the money and tax the people with instant recovery then pull it and bang goes the economy.

" I'm looking real-world evidence over an extended period. That is indeed the "forest.""

What you mistake as the "forest " is a handful of saplings at the forest's edge. Indeed the very short-term effects of Abe's retread experiment appear to make a beginning, but as the seeds sown on shallow ground have no deep root, when the heat of summer begins the roots in the shallow ground dry up and the whole field of young plants wither.

Abe seems to be promising to spend more than he will gain from the increase in the consumption tax and that might keep the economy stable for the next year.

What I can't understand is, given the government's 2% inflation target, why is it possible to take out a 35 year, fixed rate loan at 1.7%. Does this mean the markets don't expect the inflation target to be met? Any banks making such loans would surely become insolvent if interest rates spiked in the future.

The same applies to bond yields: why would I lend money to the government at 0.5% when they have a stated aim of devaluing that money by 2% per year? It seems like a foolish move to me, but the banks continue to buy up government bonds without a care in the world.

If inflation and the interest rate did increase to 2% the government would soon be bankrupt, as would the banks. Some old fools would be shown on TV bowing and apologising, but your savings would be gone, replaced by "New Yen" of significantly lower value. There's a reason these thieving politicians hold most of their assets in the form of land and property, rather than cash: they know what is coming.

JeffLee, so 14 years without a risk coming to fruition is good enough for you, and the Bank of Japan governor is an 'idiot'. OK alright you sure are alleviating all my concerns!

To be honest, I have got to think that you are just loaded up on JGBs and yen, because I can't understand how a rational person would make such arguments. Again, just because something had hasn't happened does not mean it can't.

"so 14 years without a risk coming to fruition is good enough for you,"

Err, yes it is. We're talking the effects of monetary policy. LOL. Maybe your crowd can continue to be wrong for another 50 years?

"because I can't understand how a rational person would make such arguments"

A "rational" person examines the evidence, and the evidence is on my side, as I pointed out so convincingly.

Mr. Kuroda's "fiscal consolidation" means "austerity." He had to go out and find another phrase after austerity policies were discredited based, yes, on evidence and after its supporting theoretic framework was found to rely on... falsified data! I can't understand how a rational person can't not see him as an idiot.

JeffLee

14 years might seem a long time to a teenager, but for a human being with a lifespan far longer than that, to me it seems extremely reckless to call that a solid track record, and discount to 0% the possibility of Japan's massive debt ever possibly causing any issues. That's really not risk management, it's just wishful thinking.

A "rational" person examines the evidence, and the evidence is on my side, as I pointed out so convincingly.

Sheez, way to blow your own trumpet! I don't see that you've convinced anyone, besides yourself. Your "evidence" is that Japan hasn't had a fiscal debt crisis yet. You offer no explanations or evidence for why JGBs are so unpopular amongst foreign investors, for example, and label the BoJ governor an idiot because he calls for fiscal consolidation. Newsflash to JeffLee: Kuroda isn't the only one. Credit rating agencies rate Japan's debt alongside that of Qatar, and the trend has been not up, but down. Try the IMF for more instances of attention being drawn to the risk. R.I.S.K, if you need to find it in a dictionary!

"You offer no explanations or evidence for why JGBs are so unpopular amongst foreign investors, for example,"

That really isn't a factor when the bond auctions are already oversubscribed 360% while offering the world's lowest rates.

The evidence are int. rates and inflation levels. Both have long been extremely low, when the austerity ("fiscal consolidation") crowd predicted the stimulus would trigger them to go extremely high. How more wrong can you get?

But here's your explanation: the BOJ buys lots of the bonds, in its effort to lower the int rate, which is desired when GDP growth is low and with no inflation. Letting rates rise would choke off any growth. This doesnt cost anyone anything, since it's just an asset swap.

The other bond buyers are companies that have accumulated lots of yen from international trade and need somewhere safe to park all that money. They see JGBs as extremely safe because they're backed by the Japan gov't, which is seen as among the world's most stable.

If you can derive a crisis scenario out of that, then you've got a fertile imagination indeed.

BTW, the credit rating agencies gave AAA ratings to subprime backed instruments until mid 2008. And you trust them?!?

That really isn't a factor when the bond auctions are already oversubscribed 360% while offering the world's lowest rates.

That's precisely one concern. Why is it that domestic entities dominate what is one of the the world's least attractive investments? If Japan's government had a more diversified, more global investor audience I'd have higher confidence.

The other bond buyers are companies that have accumulated lots of yen from international trade and need somewhere safe to park all that money. They see JGBs as extremely safe because they're backed by the Japan gov't, which is seen as among the world's most stable.

So long as such a perception remains, everything may indeed be fine.

But I think the perception would be on more dubious grounds if the government were making no medium to long term moves towards fiscal consolidation. Raising taxes is stupid to you in terms of growth in the short term, but in the medium to longer term I think it is a plus in terms of maintaining confidence in the government's promises. (Structural reform would help perhaps even more depending on how Abe goes about it.)

BTW, the credit rating agencies gave AAA ratings to subprime backed instruments until mid 2008. And you trust them?!?

I didn't say I trusted them, only that even those same agencies rate Japan's debt alongside Qatar's. (Whether one personally trusts ratings agencies or not, they do have an influence on the investment decisions made by others.)