Kan, referring to Japan's debt rating cut, says fiscal discipline vital

I think the government should assemble a study group to research this issue at great length.

persistent deflation

I don't buy cars, machines or computers every day of the week. The cost of living is not in a "persistent deflation" mode.

If this S&P rating were accurate we should be back to USD 1.00 = Yen 100.

little faith in the government’s ability to make meaningful progress.

S&P are not the only ones with this sentiment

While many policymakers and voters acknowledge the need for reforms, there is no consensus on specific action.

the same story for the last 20 years....

The problem is that they will never elsect a fiscal conservative with a very direct but truthful view: cut spending or we are in trouble!

They'd rather have another lying a-hole who would wave his fist at Russia and China, but totally ignore local problems.

Kan, referring to Japan's debt rating cut, says fiscal discipline vital

Gee, you think?

Kan has proposed a record 92.4 trillion yen budget for the next fiscal year starting April 1

I would hate to see what it would be without his renowned fiscal discipline.

‘‘When serving as finance minister, I was reminded of how important fiscal discipline and government bonds are,’’ Kan said in a parliament session

And that all went out the window when I became prime minister.

Well, from a macro view of Japan's economy, they have been doing a good job in keeping the keel steady since former PM Koizumi. Japan will have problems as the USD$ is being devalued w/ QE and QE2. The environment is bad, Japan is reacting to the changes in the situation.

Aren't these the people who gave AAA ratings to all that new toxic debt? They don't know pee-squat, sitting in their big New York City offices lording it over everyone. They didn't have a clue what was going on in the US, and they certainly don't have a clue what is going on here. Please ignore.

My rating for S&P: FFFF

Think about it for a moment - downgrades lead to weaker yen, weaker yen leads to better exports AND leads to rising prices of imports which helps to boost inflation which leads to wage increase demands and maybe a way out for Japan. Hey presto no more deflation! These guys ain't stoopid..... there's a message to the madness!

The problem is that they will never elsect a fiscal conservative with a very direct but truthful view: cut spending or we are in trouble!

Problem is, it ain't that simple. Every time in the last 20 years that Japan has tried to cut down spending or raise taxes, the economy has nosedived. What they saved by cutting, they ended up losing more in revenues, and so they reversed course. UK and other European countries are learning now that that is how things work. That doesn't mean they should keep spending, it means that it is a catch-22, and if the choice is between take your pain now or put it off until later and hope it goes away, politicians will usually in the end choose the second option.

Anyways, looking more and more like Japan did everything wrong the last twenty years by giving away money to banks (that would be quantitative easing in plain English), and deficit government spending. The one logical solution was never tried, that would be the one that the guy who came up with the term quantitative easing says it was really supposed to mean, increasing the amount of money in circulation. The problem is that by following that solution, the world financial system would be exposed for the fraud that it is. Until the costs of maintaining that system are seen to be greater than the costs of exposing it, nothing is going to change and things will just get worse.

And the scariest thing is that the rest of the world seems to be following blindly down the same path Japan has blazed for them.

"...As I am ignorant about this kind of thing, I’d like to talk about it some other time.’‘

What an absolute tool.

Hey, Naoto... I'm "quite ignorant about taxes... I'd like to pay them some other time (not at all)". Bet that would catch a government official's attention. But I want to try and get this straight... the man is saying fiscal discipline is vital, and talked about the economy the other day, but is ignorant of it all?

The answer is not just to spend out of control. I can't accept that building a trillion-yen bridge that 5 cars cross an hour somehow magically kept the economy from tanking. Keynes died a long time ago. Let his wrong economic theories sink already. The economy does not follow linear curves like he pretended. Keynesian economics is based on bad math without scientific backing.

Aren't these the people who gave AAA ratings to all that new toxic debt? They don't know pee-squat, sitting in their big New York City offices lording it over everyone. They didn't have a clue what was going on in the US, and they certainly don't have a clue what is going on here. Please ignore.

I was wondering how many posts I would need to read until I got to this most predicatable post. It is true, the agencies rated a lot of debt (and banks as a result) with investment grade ratings. They were faced with new products and made some wrong assumptions.

However, with country debt and corporate debt, they are far more accurate. The ratings are based on fundamental concepts - level of debt, savings, growth in economy etc. In the past they have provided a fairly good guide to the chance of default. I have seen S&P's own historical figures on the percentage of default in 5 years given each rating. The good news for investors in JGBs is that AA- is still pretty good.

However, the AA- rating is now 3 ratings below the AAA rating that most G7 countries enjoy. Japan's debt has ballooned over the past 20 years to have massive multiple of GDP and it does not seem to have any plan as to how to pay it off. The only realistic way out is to inflate away the debt at some point in the future, which is a de facto default on its debt.

I can't accept that building a trillion-yen bridge that 5 cars cross an hour somehow magically kept the economy from tanking. Keynes died a long time ago.

Not sure where and when JM Keynes said that you should build a trillion yen bridge. Could you send a link? Obviously you have read a lot of Keynes' work, so you know where to find it.

To those who think Keynes' theories were completely wrong, please, look at the UK. The new Conservative-LibDem coalition has decided that economic stimulus was useless and have started down the path of austerity and, surprise, the UK's GDP has now contracted 0,5% in the last quarter of 2010, basically the only major European country to do so. The government's reaction? Blame it on the weather. I am not kidding.

As to Keynes' "linear curves" point that sengoku38 mentioned... actually, that's done by most economists, because they generally just use these curves to demonstrate principles, it's not meant to be taken as the real forms that the economy takes. That being said, Keynesianism has worked pretty well in the past, the timing of countries' exit from the Great Depression correlates very well with when they adopted what we would call Keynesian policies.

The Japanese would need to get more inflation to get their economy off the ground and reduce debt, but with the amount of old pensioners, that's a politically suicidal proposition. There is also the problem that the Japanese economy has to deal with a diminishing working-age population which drags its GDP down even if unemployment stays low and productivity keeps increasing. In the long term, the solution calls for more children, or juts take the shortcut of immigration (which has its own problems with integration of newcomers and the like). I'd recommend the adoption of better family policies to support parents, attempts to change workplace culture to stop the japanese habit of long-days of low hourly productivity and other policies to favor increased woman participation in the economy.

Short term severe austerity will produce severe economic results. What's needed is a long term plan to reduce debt and a short/medium term plan of investment and spending to stimulate the economy. Obviously,the specifics of these long and short/medium term plans need to be hashed out. But that's what the markets want to hear, some sort of plan of action.

To those who think Keynes' theories were completely wrong, please, look at the UK. The new Conservative-LibDem coalition has decided that economic stimulus was useless and have started down the path of austerity and, surprise, the UK's GDP has now contracted 0,5% in the last quarter of 2010, basically the only major European country to do so. The government's reaction? Blame it on the weather. I am not kidding.

Keynes theories are wrong over the long term, but correct over the short term. What happens when the government stops spending? Lots of people laid of from the public sector, people laid off from the private sector whose companies depended on government contracts. The private sector can't simply absorb the shock overnight. And if things aren't eased on the private sector to make business better. (IE lower taxes, less regulation) then it will be even longer until those displaced are able to find new jobs. Thus, you'll see a short term contraction followed by slow growth. In other words, no surprise. However doing this, despite the harsh short term problems, positions the economy to be much stronger over the long term. Reducing debt is a good thing.

Regarding Japan specifically. This comes as no surprise at all. I've known for some time this was coming. Actually, I'm a bit surprised its taken this long, and that they didn't downgrade it further.

Japan has immediate problems of growing pension and health care costs, lower saving and investment rates, and a shrinking work force. Japan needs extensive reforming the strict immigration policies. Because of its homogeneity, Japanese society still views outsiders with suspicion. Japan should make itself a country that is attractive to people so that more educated foreign nationals live and work in Japan. The government should also solve the problem of the country’s low birth rate.

(IE lower taxes, less regulation)

If you look at economic strategies that used lowing taxes, in particular corporate taxes, the end result has always been the same, less taxes = more debt (see the amount of national debt that grew under Reagan, hint: he doubled it). As well less regulation, compare what happened to US banks(less regulated) vs Canadian Banks(more regulated) during the financial "meltdown". The government should deeply cut non-essential program spending, halt a large majority of it's foriegn aid (the US should do this as well) and if they really need to cut taxes, give tax breaks to the largest comsumer base the middle class and they will eventually start consuming more and business entities profits will increase. Otherwise they should focus on paying down debt, interest payments are wasted monies, especially in when it comes to government spending.

Good_Jorb at 06:08 AM JST - 29th January. halt a large majority of it's foriegn aid (the US should do this as well) and if they really need to cut taxes, give tax breaks to the largest comsumer base the middle class and they will eventually start consuming more and business entities profits will increase

This will not happen to Japan. Foreign aid is now an indispensable part of Japan's foreign policy. Foreign aid is sometimes used as an instrument to establish better ties with other countries. It is also used as a means to expand the market of the donor countries. The recipient country is required to make certain purchases only from Japan, or countries suggested by it. Clearly, economic development in recipient countries would also enlarge the market for the products of Japan.

If you look at economic strategies that used lowing taxes, in particular corporate taxes, the end result has always been the same, less taxes = more debt (see the amount of national debt that grew under Reagan, hint: he doubled it). As well less regulation, compare what happened to US banks(less regulated) vs Canadian Banks

This is both naive and misleading. While the debt did increase under Reagen, revenues also increased tremendously, and the tax breaks helped push the US out of a recession that it was dealing with. Aside from that, military spending jumped hugely, eventually bringing down the Soviet economy.

Kan didn't even have the fiscal discipline to remember to pay his own pension contributions!!! Remember that one..... he resigned for it! Now he says 'fiscal discipline is vital.' What a joke

Molenir:

Keynes theories are wrong over the long term, but correct over the short term. What happens when the government stops spending? Lots of people laid of from the public sector, people laid off from the private sector whose companies depended on government contracts. The private sector can't simply absorb the shock overnight.

No one is talking about having the private sector take over public spending overnight. The idea of Keynes was that the government should act counter-cyclically to smooth out the normal ups and downs of the market. This slows down grown in boom years, but it often does so by limiting the growth of bubbles that take huge chunks of the economy down when they burst. Because that's the problem with letting recessions "blow over" by themselves, sometimes there is no V recovery but an L one, meaning a part of the economy is just plain gone, and growth restarts at a lower level.

Basically, Keynes' idea was that when private spending faltered and caused a recession, public spending had to come online to support demand. When private spending started increasing again, public spending should be phased out. Repaying for the public spending then implies taking money out of the economy by surplus in good years, but overall the effect is actually pretty good, and it's more in line with human psychology because we, in general, tend to prefer stability.

This is both naive and misleading. While the debt did increase under Reagen, revenues also increased tremendously, and the tax breaks helped push the US out of a recession that it was dealing with. Aside from that, military spending jumped hugely, eventually bringing down the Soviet economy.

Actually, the most likely explanation of the boom of the 80s was that, in order to fight inflation in the late 70s, the Fed had adopted a very hard policy to fight inflation by keeping interest rates very high. This hurt the economy a lot, and kept it artificially low, but the interest rates were brought down during Reagan's first term, and when they were, the economy, which had the weight of the interest rates lifted off its shoulders, grew very fast. This is combined with the end of the late 70s' oil crisis. The resulting economic growth outpaced the tax cuts, which is why tax receipts increased (but declined as a % of the GDP).

As to the Soviet, I think you are repeating a myth created to try to place the USSR's fall on Reagan. For one thing, the "Era of Stagnation" of the Soviet Economy, which economic growth became slower than that of the western powers, started in 1973, 8 years before Reagan became president. So when RR came in, the damage to the Soviet economy was already done and its highly bureaucratic nature, with many entrenched interests, made it really hard to reform. At the same thing, the population was highly educated and cynical of the government.

The fall of the USSR came not from external pressures, but from internal ones.

@Ah so, yes a "predictable post" because it is true. Japan is the world's greatest creditor and the US is the greatest debtor. Where would you put your money? And also, if, as economists who know something about Japan know (if you can read Japanese), net of government assets (not including all that credit owed Japan), and debt is only 100% of GDP. Not good, granted, but nothing like the catastrophy they are putting out. Anyway, the 82 yen to the dollar says it all (yes, even if it is a sign that the dollar is weakening rather than the yen strengthening -- its the same thing).

@Ah so, you probably noticed that I should have said "net OFF the governments OWN assets". Anyway, the next evidence that this is a non-story is that a day later it has already dissappeared from the news, with not much commentary (and the commentary that was written was half-hearted going through the motions reciting all the well known problems). Ho hum. Nobody took it seriously. Evidently, PM Kan hadn't heard about it at the opening of the daily diet session when asked about it.

Anyway, the next evidence that this is a non-story is that a day later it has already dissappeared from the news, with not much commentary

@shinjukuboy - you are right about the net government debt. A very valid point, but I wonder how long it will be before the net debt reaches the levels of the gross debt today. The J-government cares less about external rankings because the majority of purchasers of JGBs are Japanese institutions.

A AA- rating is still the best rated highly liquid debt you can get. Japanese investors have little choice but to buy it, but without a serious plan to turn the economy around, the government will eventually have to resort to inflating the debt away.