BOJ anesthetizing Japan to fiscal risks
Putting off painful reforms passes debt bill to future generations
MIKIO SUGENO, Nikkei senior staff writer
TOKYO -- Rarely do any international organizations change economic projections in response to a policy scheme proposed by a politician who has yet to take office.
But the Organization for Economic Cooperation and Development recently did when it said the gross domestic product of the U.S. and the world will increase by an additional 0.8 percentage point and 0.3 point, respectively, on infrastructure investment and corporate tax cuts outlined by U.S. President-elect Donald Trump.
Trump's proposals are a boon to the OECD, which has been calling for advanced economies to increase fiscal spending in the face of low economic growth and widening inequality and promote structural reforms to address long-standing problems.
While the economic focus of the world is shifting from monetary to fiscal policy, the OECD sees Japan as a notable exception. Japan has little room left for increasing fiscal spending due to the national and local government debts being more than twice as large as its GDP.
Although the Japanese government has a medium-term goal of cutting the ratio of the nation's primary balance deficit to 1% of GDP in 2018, the OECD expects it to be 2.75%.
Ironically, Japan's interest in fiscal health has waned, and the Bank of Japan is partly responsible for the indifference.
Numbing the pain
The BOJ has purchased roughly 40% of Japanese government bonds under its quantitative easing policy, and the rate will reach around 60% in March 2019 at the current pace of acquisition. The central bank has also launched a program to keep the yield on 10-year JGBs at around zero.
Interest rates rise when markets are concerned about fiscal deterioration. But fiscal risks have become less visible because the BOJ has made the mechanism unworkable.
In short, the desperate policy measures adopted by the BOJ to end Japan's deflation are acting as an anesthesia that numbs the government's sense of crisis.
Prime Minister Shinzo Abe said earlier in December that the appreciation of the yen is to blame for a tax revenue shortfall expected in fiscal 2016 through next March. He probably meant that overseas earnings by Japanese companies will decrease when they are repatriated, thus eating into tax revenues.
In any case, playing the blame game is a lame excuse for a leader who boasted about tax revenue increases as a fruit of his economic policy, dubbed Abenomics.
The 2017 fiscal budget is expected to barely avoid an increase in government bond issues as it will raise the projection of tax revenues thanks to the yen's recent depreciation, ascribable to Trump's policy proposals.
A natural increase in social security expenses resulting from the aging of Japan's population is expected to be within the target of 500 billion yen ($4.25 billion).
Although near-term budgetary maneuvering may be successful, specific medium- and long-term programs for fiscal rehabilitation and social security reforms are completely absent.
"No fiscal soundness without economic revival" is a slogan of the Abe administration. It is theoretically correct to say that fiscal rehabilitation is impossible without an increase in tax revenues through economic growth. But more is needed.
Kenji Yumoto, vice chairman of the Japan Research Institute, calculates that government debt will exceed financial assets held by individuals in fiscal 2025 if the outstanding balance of the debt increases at its average pace in the absence of an increase in the assets. In such a case, the current mechanism of Japan's debt-based finances covered with savings by households and other depositors will collapse.
The BOJ will eventually have to implement an exit strategy from its unprecedented easing measures and normalize monetary policy. Yumoto said the shift will occur around fiscal 2020.
The Summer Olympics will be held in Tokyo in 2020. After the Olympics, Japan faces several problems: economic slowdown resulting from the end of special demand incurred by the massive event, even faster aging of its population and higher interest rates.
Much time is needed to plan and implement muscular policy measures. The current procrastination of painful and unpopular reforms is gradually but steadily passing the burden to future generations.