March 2, 2021

News Analysis: Japan Seeks Answers to Debt Load Without Angering Voters

Now, after Mr. Noda was elected Japan’s prime minister this week in response to the nation’s natural and nuclear disasters, the question is whether he can administer his prescription: raise taxes while reining in spending.

“We will no longer spend wastefully as if we are pouring buckets of water into a sieve,” Mr. Noda declared in a speech on Monday just before Japan’s ruling Democratic Party elevated him to the top job.

But that political resolve could prove hard to sustain — and not simply because of the systemic weaknesses that have resulted in six prime ministers in the last five years.

This is a country that was already addicted to its public spending, even before the huge needs of the postquake reconstruction. The last time the Japanese government ran a budget surplus was in 1992, almost two decades ago. Tax income now covers less than half of Japan’s annual budget.

Mr. Noda’s call for fiscal restraint is timely, given the global context. Last month, the ratings agency Standard Poor’s stripped the United States of its top credit ranking, saying political paralysis in Washington was making the country less creditworthy. In Europe, bond investors make daily sport of handicapping the relative risks of the debt loads shouldered by members of the euro monetary union.

“Sovereign risk is spreading to, and starting to engulf, large economies that were previously unaffected,” Hideo Kumao, chief economist at the Dai-ichi Life Research Institute, said in a recent research note.

For years, Japan has managed its gargantuan debt load, and bond buyers have been willing to lend the government money at some of the world’s lowest interest rates. But for various reasons — including that low tax rate and Japan’s aging, shrinking population — the borrowing binge is looking unsustainable.

On July 23, Moody’s Investors Service lowered Japan’s credit rating by one notch, to a level two grades below the top rating, saying weak prospects for economic growth, as well as its recent disasters, made it difficult for the government to tackle its debt.

In the near term, though, Mr. Noda’s government has little choice but to spend on postquake reconstruction. The government estimates that losses could reach as much as 20 trillion yen ($260 billion) just for the natural disasters, excluding costs from the continuing nuclear crisis at Fukushima.

That means spending on a scale unprecedented even for Japan, whose decades of public works projects are a big reason that the national debt is expected to reach 228 percent of its gross domestic product this year. That is far higher than even debt-saddled Italy, at 118 percent, and the United States, at 92 percent, according to the International Monetary Fund.

And in trying to raise taxes, Mr. Noda must contend with a painful historical precedent: an increase in the consumption tax meant to help finance rebuilding after the 1995 earthquake in Kobe snuffed out a nascent economic recovery. The consumption tax has not been raised since.

That is probably why in his speech on Monday, he shied away from using the word “tax” entirely. “If there is a revenue shortfall, we may have to ask the public for help,” was the closest he ventured.

The precarious standing of the ruling Democratic Party, whose ratings have slumped after two unpopular prime ministers, has made politicians adverse to any move that might anger voters.

A particular headache for Mr. Noda is a party heavyweight who has turned rebel: Ichiro Ozawa, a longtime advocate of robust government spending to prop up growth, and a fierce opponent of raising taxes.

Article source: http://feeds.nytimes.com/click.phdo?i=e33bcad8870eb0017a5d43b4daf09d74

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