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2015年7月 2日 (木)

(社説)日本の財政再建 やはり先送りは危うい

--The Asahi Shimbun, June 30
EDITORIAL: Japan’s fiscal crunch requires immediate action
(社説)日本の財政再建 やはり先送りは危うい

Japan is submerged in debt. As of March, the government was in hock for 1.053 quadrillion yen, twice as much as the nation’s gross domestic product.
Japan’s public finances are in worse shape than any other industrial nation, even than Greece, which is trapped in a serious debt crisis. Government bonds outstanding account for over 80 percent of the nation’s overall debt load.

During the current fiscal year, which started in April, the Japanese government will have to issue 36 trillion yen worth of new bonds to plug the budget hole. When bonds issued to refinance debt coming due are counted in, the government needs to borrow 170 trillion yen in the year through March 2016.

Can Japan really avoid a fiscal disaster if it is running up so much debt? Won’t the prices of government bonds collapse in the market where government debt securities are traded?

Huge potential risks in the market

Most government bonds are financed by domestic funds, ultimately by the savings of the people. Many experts say there is no need to worry about a full-blown debt crisis in Japan because the government is not dependent on borrowing from fickle foreign investors who rush to the exit at the first hint of trouble.

This common fiscal narrative is correct from the viewpoint of the flow of money. But we should not overlook one worrisome factor behind the money flow structure.

That’s the Bank of Japan’s aggressive monetary easing, which has been described as “different dimension” expansion of money supply.

As the centerpiece of its credit easing program, the central bank is buying tremendous amounts of government bonds. Since it adopted additional monetary easing measures last autumn, the BOJ has been buying up to 90 percent of the bonds the government issues in the market.

The BOJ is legally banned from underwriting government bonds, or buying bonds directly from the government.

This rule was established because the Japanese central bank once caused a virulent bout of inflation by helping the wartime government raise funds to finance the war.

Currently, the BOJ buys government bonds via private-sector financial institutions, just short of underwriting of government bonds.

Anything could happen in a financial market. Nobody can guarantee that Japanese government bonds will never crash.

If the bond market is roiled by a massive selloff by speculators, corporate borrowing costs as well as interest rates on housing loans will soar. When that happens, the government’s tax revenue will fall due to the consequent weakening of the economy while the government’s debt servicing costs will surge. That will be a fiscal nightmare not unlike what Greece is now facing.

In order to prevent this kind of fiscal disaster, the government needs to keep demonstrating its solid commitment to paying back debt and thereby avoid arousing doubts about its creditworthiness.

Currently, the BOJ is nipping market disruptions in the bud with its massive bond purchases. But the potential risk is underscored by the fact that none other than BOJ Governor Haruhiko Kuroda has been preaching the importance of fiscal rehabilitation to the government.

Can’t bank on economic growth

The government’s plan to regain fiscal health, which calls for a primary budget surplus in fiscal 2020, will be an acid test of the government’s will to pay off debt.

But the government’s plan is based on the assumption that its tax revenue will keep growing in line with nominal economic growth at annual rates of over 3 percent, a target that is hard to achieve.

While calling on the government to go ahead with the postponed additional increase in the consumption tax rate to 10 percent, the prescription for curing the nation’s fiscal woes doesn’t propose any further tax hike.

The plan calls for policy efforts to curb budget growth and cut certain expenditures. But it offers no specific measures or a road map to rein in government spending.

The government should seek to increase its tax receipts by stoking economic growth. But banking on revenue growth due to economic expansion is a hope-for-the-best approach to restoring fiscal health that should not be adopted.

A reliable way to cure the budget ills is resorting to a combination of spending cuts and tax hikes. Both will inevitably be painful.

First of all, the government needs to hammer out a realistic and effective plan to restrain budget growth and reduce its outlays. All policy areas need to be reviewed for budget cuts. But the focus should be on social security spending, which accounts for one-third of the general-account budget.

If nothing is done, social security spending will continue growing automatically by nearly 1 trillion yen every year due to the aging of the population.

Japan’s social security system, whose main components include the public health-care, nursing-care and pension programs, is structured along the lines of generations. Basically, the working population supports retired seniors.

Given that disparities in assets and income are growing within the same generations, however, it is vital to restructure the system toward distribution of the burden according to wealth.

Considering the seriousness of the fiscal squeeze, curbing budget growth and trimming expenditures here and there alone will be far from enough. The government should also consider a tax increase.

The pillar of any plan to increase taxes should be a consumption tax hike.

The most appropriate source of revenue to finance social security spending, which grows regardless of economic conditions, is the consumption tax. That’s because consumption tax receipts are less susceptible to economic conditions, and the burden is shared broadly by the entire public.

The plan for integrated tax and social security reform worked out by the government three years ago is based on these ideas.

The administration of Prime Minister Shinzo Abe has ruled out raising the consumption tax rate above 10 percent. But a 10-percent consumption tax will be grossly insufficient to rebuild Japan’s debt-laden public finances.

That’s obvious from the fact that many European countries impose a value-added tax (equivalent to Japan’s consumption tax) of around 20 percent on purchases of goods and services.

As part of an effective tax overhaul, the income and inheritance taxes, which are levied on people’s income and assets, should also be reviewed for making the well-to-do shoulder their fair share of the burden.

Inevitable pains

All these reforms would be painful for taxpayers. But they are inevitable steps to ensure the long-term sustainability of social security and stop shifting the burden to future generations.

If the government shies away from fiscal reform and allows the situation to continue deteriorating, it could eventually face a fiscal collapse.

Such a situation would cause the biggest damage to people’s livelihoods.

Japanese are now facing a crucial choice. Do they accept a radical reform of the system and an increase in their burden to be implemented through revisions to related laws by their elected representatives? Or do they opt to allow market pressure from rising interest rates to force them into necessary reforms?

We should choose burden sharing through the democratic process.


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