politics

OECD says Japan needs spending cuts; not on track to meet fiscal targets

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By Stanley White

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So the OECD has stated that Japan needs to increase taxes to get its fiscal house in order, but has lowered its growth forecast because of the most recent tax increase has caused people to stop spending. A right bunch of geniuses they are! I know that the situation is not looking good, some may even say dire, but do all of these think tanks keep saying the same thing about the UK, or France, or any other G7 countries? I don't think it is so rosy in many of these other places, but we don't hear about how they must reform or go belly up. The Japanese must be tired of hearing this tripe!

2 ( +4 / -2 )

Japan needs to include spending cuts

NOW? they realized this? We've all been saying it for so long. Instead of raising taxes, they need to cut spending. So many places they could save a lot of money. Starting with the unnecessary road renewals.

4 ( +4 / -0 )

I don't think it is so rosy in many of these other places, but we don't hear about how they must reform or go belly up. The Japanese must be tired of hearing this tripe!

Japan's has already gone belly-up, and is now in a state of decay.

Japan's debt is far higher than in other not-so-rosy places. Unlike other G7 countries, Japan faces a steeply-declining population, has almost no marketable energy, agricultural, or material resources, and is surrounded by aggressive growing economies which can produce quality goods for less money.

“We see gains in consumer sentiment. We also expect real wages to turn positive. Wages are being supported by the current labor shortage.”

Overlooked is the fact that though there is a labor shortage, this is compensated for by a shortage of consumers. At the current rate of population decline, there are some 200,000 fewer Japanese consumers each year, and, contrary to what many think, most of what Japanese companies produce is domestically-consumed. Fewer customers means fewer sales, and fewer sales means less money to employ or pay salaries. The labor shortage has not resulted in higher wages, it has resulted in lower wages and more part-time jobs.

The Paris-based think tank says Japan’s economy will expand 0.7% this year, down from its previous forecast of 1% growth.

This number is optimistic. Worse yet, much of this year's GDP growth (if any) will have been the result of government deficit spending on "stimulus" projects. This means money which might have been used for productive purposes by the private sector will have to be spent in taxes to pay for this spending, which will weigh down further on future growth.

The predicted anaemic 2016 growth rate of 1.4% will be the result of people making purchases before the consumption tax gets bumped up in 2017. And any gain in GDP in 2016 will of course be wiped out by losses in 2017 after the tax is raised.

“Japan could face a loss of confidence in its fiscal sustainability,

This has already happened, which is why the BOJ is now the largest purchaser of JGB's, and why institutional buyers of bonds have been shedding their JGB holdings. Had JGB's been traded on the international marketplace, the bonds would have collapsed, and a spillover would have occurred. But since the bonds are sold to a captive market which has a lot to lose if the bonds collapse, they continue defy economic gravity, and pay almost nothing in yields, despite Japan's lack of fiscal sustainability. Actually, had Japan sold it's bonds in the international market, they would have had to manage their economy more responsibly to attract bond buyers, and we would never have seen the national debt surpass 150% of GDP, let alone 250%.

An increase in the nationwide sales tax to 10% from 8% scheduled in 2017 is not enough to achieve a primary surplus in fiscal 2020, so the government should broaden the base for corporate and income taxes, the OECD said.

What is not mentioned is that taxes and living costs in Japan are already too high, and any increase in taxes will be revenue-negative, just as the last tax hike was. More tax revenue has been collected since the last tax hike occurred, but every extra yen the government collected resulted in a loss of 3 yen to the economy due to economic contraction.

The tax base cannot be broadened when the population is falling as quickly as it is, and when the majority Japanese companies are barely keeping their heads above water, and the larger companies are moving more and more of their operations away from Japan. The tax base does not need to be broadened, the government needs to be narrowed. We need to take away Abe's credit cards and check books, and put him and his buddies to work at places like Sony, Sharp, and Matsuzakaya, so they can see what a mess they and their predecessors have made of things.

5 ( +9 / -4 )

Japan needs to include spending cuts and new steps to boost tax revenue in a fiscal discipline plan due later this month because the government is not on track to return to a primary surplus,

A primary surplus is nothing more than the government taking more money out of the economy than it injects. And that would of course be YOUR money that it is taking out. It is also mathematically impossible for a government to run a primary surplus without either corresponding rising levels of private debt to "finance" it (not gonna happen considering the stop in the increase of private debt is the cause of the problem in the first place) or in impoverishing its citizens (which probably will still not result in a "surplus"). Anyone who doesn't understand such basic reality is financially and economically illiterate, and that includes the hack "economists" at the OECD.

0 ( +3 / -3 )

So what's next? Higher and higher sales tax! Spend more more more on Collective Defense/Office military hardware and see Japan implode when her citizens realize their cost of living becomes intolerable and kick out LDP Abe from power for decades of mismanagement using borrowed money to fund infrastructure, dole out favorite social programs for his voter base. This very high Debt/GDP is a phenomena of a failed democracy, sticking the burden to future generations.

3 ( +4 / -1 )

They should start on cutting with those VIP governmental resorts, they are freaking using our tax money so these people can go an relax.

1 ( +1 / -0 )

The OECD advises the government to implement reforms to boost growth. Abe government: Still formulating it's "3rd arrow" plan, years after coming to power.

The OECD advises to cut spending. Abe government: Just enacted a record sized budget.

The OECD advises to broaden the tax base (e.g. simplifying through elimination of loopholes and deductions). Abe government: Planning to narrow the base of the sales tax (effectively giving the heavy-consuming rich a tax cut).

... and on top of all this, the Abe government's main focus is re-empowering its military.

There is a stark contrast between where Japan is heading and where it should be heading. I broadly agree with the OECD. Poor quality government spending should be eliminated, but the primary budget deficit is massive, more than 40% of total spending. That's almost 1 in every 2 yen that would have to be cut to balance the budget. So where the spending can't be cut, it must be paid for in tax revenues, there is no other way.

“Japan could face a loss of confidence in its fiscal sustainability, which in turn could destabilise the financial sector and the real economy with large spillovers to the world economy,”

Or alternatively a loss of confidence in its currency, but basically leading to the same kind of disaster.

3 ( +3 / -0 )

Japan doesn't "need" spending cuts at all, given that its general govt budget is considerably smaller per capita than most other industrialized countries, and that the stated priority is boosting private demand and growth.

-4 ( +3 / -7 )

A primary surplus is nothing more than the government taking more money out of the economy than it injects. And that would of course be YOUR money that it is taking out. It is also mathematically impossible for a government to run a primary surplus without either corresponding rising levels of private debt to "finance" it (not gonna happen considering the stop in the increase of private debt is the cause of the problem in the first place) or in impoverishing its citizens (which probably will still not result in a "surplus").

Guy -- you keep making this same point, despite myself and others pointing out that it is totally false. First off, as the OECD points out, cutting government spending could, in fact, lead to a primary surplus, as the "hack" economists from OECD state. Second, as I have pointed out previously to you, and which you grudgingly accepted, a primary surplus can be attained with a growing economy, generating increased revenues. Which has nothing at all to do with "private debt", or "impovershing its citizens".

Anyone who doesn't understand such basic reality is financially and economically illiterate

You said it, not me.

-3 ( +1 / -4 )

Japan doesn't "need" spending cuts at all, given that its general govt budget is considerably smaller per capita than most other industrialized countries

The comparison is true, but it also implies big tax hikes are required to eliminate the budget deficit and stabilise debt levels where they are (which is already significantly higher than those other industrialized countries, as noted in the article).

Japan can choose to be a low tax, smaller government state than the rest, if it wants to. But it can not choose to be a low tax, big government state, forever.

and that the stated priority is boosting private demand and growth.

No level of growth that Japan can realistically achieve is going to increase tax revenues so much as to pump tax revenues from 50-odd trillion yen at the moment to 95 trillion yen or more needed to plug the budget deficit.

While the government "prioritizes boosting demand and growth" instead of addressing it's fiscal problems, the risks that the OECD and others highlight will linger, just as did the risks at the Fukushima nuclear plant prior to the 3/11 earthquake / tsunami.

2 ( +2 / -0 )

Japan doesn't "need" spending cuts at all, given that its general govt budget is considerably smaller per capita than most other industrialized countries, and that the stated priority is boosting private demand and growth.

Jeff -- LOL. Talk about cherry-picking your numbers. Of course you are coveniently leaving out the fact that Japanese public debt per capita, is among the highest of other industrialized countries, and that much of this debt was taken on because the J-government was, and is, spending way beyond its means.

The Paris-based think tank says Japan’s economy will expand 0.7% this year, down from its previous forecast of 1% growth

And that kind of anemic growth, but with a record budget, is certainly not going to help that.

-2 ( +4 / -6 )

jerseyboy,

cutting government spending could, in fact, lead to a primary surplus

Boosting government spending for decades sure hasn't helped, you'd think it's worth a try, wouldn't you.

Some people complain about the Japanese not spending their money. It's the old people with most of the money. What would happen if the government stopped paying for the health care of the rich elderly? Are they going to just die sick, preferring to cling to their bank books showing off balances in the tens of millions, or are they going to spend their money and keep living?

The problem, alas, is that few in Japan running for office have the balls to do what is necessary, and thus any policy unpopular with the elderly is destined for the scrap heap. Hence Japan is likely to continue to speed towards the cliff's edge.

4 ( +4 / -0 )

JeffLeeJun. 04, 2015 - 11:12AM JST

Japan doesn't "need" spending cuts at all, given that its general govt budget is considerably smaller per capita than most other industrialized countries, and that the stated priority is boosting private demand and growth.

I really find it less believable or rather worrisome about the Canadian education system that you claim to have a economics degree.

You are just 100% wrong.

Figures for 2013... God knows how bad 2014 is going to look.

Japanese Government Revenue = 1,739,000 million US$

Japanese Government Expenditure = 2,149,000 million US$

Japanese Deficit In Monetary Terms = −410,000 million US$

Japan deficit in percentage terms = −23.5%

Apart from the USA, Japan runs the biggest fiscal deficit, in monetary terms, than any other country in the world and in percentage terms, apart from Norway (which is covered with the government's sovereign fund) and Pakistan, Japan runs the biggest budget deficit of all the countries in the world.

This, as others have pointed out, but you choose to ignore, with a shrinking tax base and an expanding welfare base.

I give up

4 ( +5 / -1 )

Jeff -- LOL. Talk about cherry-picking your numbers. Of course you are coveniently leaving out the fact that Japanese public debt per capita, is among the highest of other industrialized countries, and that much of this debt was taken on because the J-government was, and is, spending way beyond its means.

Jeff, just so you'll know I actually have numbers to support what I say-- as opposed to wishful thinking -- Japan ranks #1 in governmnet debt per capita at just under $100,000 per person. For comparison, the U.S. is about 1/2 that at around $59,000 per person. Greece, meanwhile, is only about $38,000 per person. You still want to try to convince us that a government that has spent itself into that kind of position does not need to cut spending?

0 ( +4 / -4 )

jerseyboyJun. 04, 2015 - 12:26PM JST

Jeff, just so you'll know I actually have numbers to support what I say-- as opposed to wishful thinking -- Japan ranks #1 in governmnet debt per capita at just under $100,000 per person. For comparison, the U.S. is about 1/2 that at around $59,000 per person

Another fact conveniently ignored.

The last time Japan government had a budget surplus was in 1992.

'It hasn't happened yet so it's never going to happen' are hardly the basis of a solid skill set for a high school student, let alone ..........

4 ( +4 / -0 )

Gary, jerseyboy, I think what Jeff was saying that the expenditure side of Japan's budget is not big, relative to other nations, and therefore, spending cuts are not needed.

I think he has that much right. But if you are spending twice tax revenues, it's not much consolation IMO.

1 ( +1 / -0 )

The OECD "sees" many ludicrous things. Perhaps their crystal ball is defective. I see an accelerating decline.

-1 ( +0 / -1 )

OECD: Obvious Expression Central Dept.

1 ( +1 / -0 )

Let's also be clear about the nature of Japan's debt problem. Its ratio of gross government debt to GDP is over 240%, which sounds perfectly awful. But if one nets out the value of debt held by different branches of Japanese government, then the ratio falls to less than 140%. The Bank of Japan alone holds about 20% of outstanding Japanese government bonds and is buying more each year than the government, spendthrift that it is, can issue. And despite all that interest rates and inflation are as low as low can be. Japan is rapidly moving toward a world in which it can simply net out the obligations everyone insisted it would need to bear. That is debt monetisation, the harbinger, if ever there was one, of hyperinflation. And yet hyperinflation is about the last thing Japan has to worry about.

It's ironic, in a way: by dealing a blow to the economy and reinforcing deflationary pressures the consumption tax rise, which was intended as a step to deal responsibly with Japan's accumulated debt, may have cleared the way for the relentlessly acquisitive Bank of Japan, and to monetisation. Of course, this wouldn't represent a free lunch. If one believes that Japan would have functioned as a more or less normal economy over the last decade or two had it not been stuck at the zero lower bound, then its experience at the deflationary trap has cost the economy trillions of dollars worth of output, and individual Japanese workers untold jobs and wage increases.

But at this point, the debate over what Japan should do about its debt is somewhat absurd. No amount of fiscal rectitude is going to get Japan out of its long-term rut. And so long as Japan is in its long-term rut government debt will build and will find its way onto the balance sheet of the Bank of Japan. It is hard to see how tax increases that undermine the effort to beat deflation serve anyone's purpose. They are paving the road, it should be clear, to something even less familiar and more bizarre than Japan's current straits: the monetisation of a massive amount of government debt with no inflationary consequences.

2 ( +4 / -2 )

Seems pretty simple to me. Big debt= spend less so it doesn't get bigger.

2 ( +2 / -0 )

Same debates every time as things get worse and worse. The reality is that there is no way for japan to recover economically. It's finished. It's the Titanic sailing towards the icebergs where it will sink out of sight for good. Foreigners will make their pot of gold, unless you are an english teacher of course, and get out. Sad but reality.

-2 ( +1 / -3 )

"Japan ranks #1 in governmnet debt per capita at just under $100,000 per person."

A favorite ploy of tabloid hacks. The long division may be correct but the concept is a fantasy, unless you're convincied the taxman is going to show up at your door with an invoice for $400,000 for you, your spouse and 2 kids.

-3 ( +1 / -4 )

So how's the FX game going for you, umbrella? I thought you predicted 140 yen to the dollar. What's your leverage ratio, if I may ask?

1 ( +2 / -1 )

"We also expect real wages to turn positive."

You could have this right now, BOJ, if you just let consumer prices fall very slightly and let companies keep wages flat. Everybody's a winner... except for Abe and the indebted Bank of Japan.

1 ( +1 / -0 )

Gary, jerseyboy, I think what Jeff was saying that the expenditure side of Japan's budget is not big, relative to other nations, and therefore, spending cuts are not needed.

I think he has that much right. But if you are spending twice tax revenues, it's not much consolation IMO.

fxgai -- huh? Jeff is not "right" by saying Japan's budget 's "not big", knowing full well, since he claims to be a financial expert, that theye are financing almost one-hlaf of that spending with debt. Would a household that has relatively modest spending, but is putting half of it on credit cards, be in good shape?

A favorite ploy of tabloid hacks. The long division may be correct but the concept is a fantasy, unless you're convincied the taxman is going to show up at your door with an invoice for $400,000 for you, your spouse and 2 kids.

Jeff, just more of your nonsense. Everyone else but you is just a "hack", right, who cannot wrap their heads around your insights into the Japanese economy? (By the way, those numbers came from an economic paper, not some tabloid.) But I guess since you earn a living by convincing folks to invest their savings in Japan, you must need to believe what you say.

-3 ( +1 / -4 )

Guy -- you keep making this same point, despite myself and others pointing out that it is totally false. First off, as the OECD points out, cutting government spending could, in fact, lead to a primary surplus, as the "hack" economists from OECD state. Second, as I have pointed out previously to you, and which you grudgingly accepted, a primary surplus can be attained with a growing economy, generating increased revenues. Which has nothing at all to do with "private debt", or "impovershing its citizens".

Seriously, arithmetic does not get much simpler than this. For any government to take in more that it spends, it must take money from its citizens. This means the citizens must either reduce their savings or take on more debt. It also means that a government has zero control over its ability to run a surplus, they are totally dependent on their citizens doing one of those two things. Which in the current Japan economic conditions they won't, as the next 5 years are going to prove. There will be no primary surplus in Japan.

Now, does a growing economy lead to a surplus well that depends. If the economy is growing because it is operating well the government will get more money back through tax and the GDP/Debt ratio will fall. This is because high GDP/Debt ratios are a symptom not cause of economic problems. And yes, I know that is difficult to understand for the causality challenged. They will not however run a surplus, they will just be taxing money that would otherwise be being hoarded in bank accounts. Savings are not taxed, spending and income are. Now if the economy is growing because of increasing debt or reduced savings then the government will be able to run a surplus. Until the debt stops growing or people run out of money, and then a recession will come. As has happened every time any country has run a surplus. Governments can also run a surplus by cooking the books and collecting taxes quicker (consumption tax hikes anyone?) but that is just an accounting trick.

Had JGB's been traded on the international marketplace, the bonds would have collapsed, and a spillover would have occurred

There is no such thing as an international marketplace for government bonds. All government bonds are sold in exchange for the domestic currency. It also makes no difference, despite the hyperventilating of alleged "financial journalists" if these bonds are sold to domestic buyers or foreigners. Money doesn't care whose name is on the account or their nationality. For evidence you can check the bond market in a little country you might have heard of called the United States of America.

1 ( +2 / -1 )

fxgai -- huh? Jeff is not "right" by saying Japan's budget 's "not big", knowing full well, since he claims to be a financial expert, that theye are financing almost one-hlaf of that spending with debt.

Yeah, but Jeff was (as you would expect) ignoring the debt and only talking about expenditures, i.e. "general govt budget ... per capita". I agree with him in the sense that relative to other countries, Japan doesn't spend outrageously more.

But I am of course with you in that relative to its tax revenues (and debt mountain), Japan does spend outrageous amounts, this is the more appropriate comparison. Either spending should be chopped down to match tax revenues, or alternatively tax revenues should be increased, or alternatively it should prepare for the consequences of repeating past mistakes.

the concept is a fantasy, unless you're convincied the taxman is going to show up at your door with an invoice for $400,000 for you, your spouse and 2 kids.

... or the central bank is going to monetize that debt, potentially destroying the value of the currency that most households in the country have more than half their wealth saved in. Kind of like happened after they started "temporarily" monetizing debt in the 1930's, but then couldn't stop.

2 ( +2 / -0 )

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