politics

Finance Ministry draft reveals deep rift on fiscal reform

14 Comments
By Takashi Umekawa and Stanley White

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All this debate on whether there will be economic growth. With a declining population base and no longer surpluses gained from the use of cheap and readily available fossil fuels, growth is impossible. Time to shift to discussions about a post-growth economy and society that can be less unequal, less materialistic and bring greater happiness.

10 ( +12 / -2 )

It's been smoke and mirrors from the start with Abe-nuttics and I just hope it's not too late before people start waking up and taking issue with his policies. He only cares about the "now" and not about the children and grandchildren that have to foot the bill.

4 ( +7 / -3 )

Excellent article, well done JT staff.

3 ( +3 / -0 )

@warispeace I still see a productive Japan in the future. But as you stated there should be focus on a post growth economy. With the declining population and low birth rate there should be focus on preparing to adjust to a smaller economy that will see growth.

1 ( +1 / -0 )

In government-speak, "stimulate" means borrow-and-spend. And politicians need to spend in order to buy votes and get elected or reelected. The vast debts Japan and other countries have is the result of this practice. "Vote for me, and I will give you blah, blah, and blah". Never mentioned is the cost of "blah, blah, and blah", or their eventual burden on current and future taxpayers. If a politician can "fool most of the people most of the time", he can stay in office indefinitely, and spend as much of the taxpayer's money as he wants.

A decreasing population means decreasing consumption, and economic contraction. Unfortunately, the nature of the population decrease means that the productive population decreases, and the unproductive population increases. This unproductive population will rely heavily on government and government spending. Planning a "post-growth" economy is not as simple as it sounds, given the number of people who will consume government services vs the number of people who will be burdened with having to pay for these services. Given the current levels of debt, population decrease, and increased consumption of government benefits, this simply cannot be afforded, particularly in a world full of other countries who are competing for business.

Growth can return, but only if the current environment is radically changed. Allocation of resources must be shifted away from the business/government bureaucracy, and to the regular people. This doesn't mean tax the rich to feed the poor, it means allowing the lower classes to own more of the economy.

Non-competive business practices, supported by a government full of former businessmen, and businesses which are full of former government bureaucrats have driven up the costs of all goods and services to normal people, and made it difficult for the lower classes to participate more fully in the economy. Entrepreneurship is almost non-existent in Japan, and any successful business which does manage to get started is generally absorbed by the larger conglomerates (if you can't beat them, buy them), who then make it as non-competitive as their other businesses. Abe's new "entrepreneurship" fund has been used mainly to bail out existing companies, or to fund projects by existing companies. Such is the nature of things in Japan, and why there is no growth.

9 ( +10 / -1 )

Advisers to Japan’s Finance Ministry have accused the Cabinet Office of making overly rosy assumptions about growth and spending, a draft document showed on Tuesday,

But the Finance Ministry document, which will be presented to Finance Minister Taro Aso later this month and form the basis of his policy stance, said Cabinet Office assumptions about the pace at which Tokyo can afford to increase healthcare spending were unrealistic and weakened the political will to implement painful fiscal reform.

Using unusually strong language, the draft also accuses Cabinet Office advisers of a “misunderstanding” in their assumption that Japan can easily lower its debt-to-GDP ratio because interest rates will remain extremely low for years.

The risk, however, is that bond yields start to rise due to worries that fiscal spending will spiral out of control, which would complicate the Bank of Japan’s government debt purchases for its quantitative easing program.

Just what myself and other posters have ben saying for a couple of years. But don't worry, Jeff and Guy will simply state that even the Fiinance Ministry does not really understand government finances, especially the huge debt, so this can all be ignored, because everything is fine. LOL.

-2 ( +4 / -6 )

The risk, however, is that bond yields start to rise due to worries that fiscal spending will spiral out of control, which would complicate the Bank of Japan’s government debt purchases for its quantitative easing program.

Complete gibberish. Bond yields are controlled by the Bank of Japan, and are set at whatever level the BOJ wants them to be set at. This is obvious from the real world evidence of the last 20 plus years. Bond investors also do not care for one second about the level of fiscal spending of the government, they just want a risk free, interest bearing place to park their money (which comes from government spending in the first place). Anybody at the Ministry of Finance who doesn't understand such real world facts, but instead believes the fairy tales they learned while getting their useless advanced Economics degrees, should be fired immediately for incompetence and being unqualified for their job.

-8 ( +1 / -9 )

Guy_Jean_DailleultMay. 20, 2015 - 09:07AM JST

Complete gibberish. Bond yields are controlled by the Bank of Japan, and are set at whatever level the BOJ wants them to be set at.

Nope... the BOJ can only control the bond yields as long as Japan runs current account surpluses. Once Japan starts running current account deficits, Japan becomes like Greece and is dependent on finance from the international markets for funding and the international markets determine bond yields.

This is so basic economics, I don't know why I need to explain it, but this discussion will go nowhere without it.

1 ( +4 / -3 )

Go Finance Ministry

1 ( +1 / -0 )

Hi Guy_Jean_Dailleult, You can be forgiven for the 'complete gibberish' comment. For many years now economists have been debating why Japanese bond yields so low?.....The 10 year JGB are considered the glue holding the economy together. Without disappearing up my own backside, M & G blog provides a insight into the debate and there relevance.......

https://www.episodeblog.com/2015/04/why-do-the-japanese-keep-%C2%A536-trillion-under-mattresses-and-why-are-government-bond-yields-so-low/

2 ( +2 / -0 )

Complete gibberish. Bond yields are controlled by the Bank of Japan, and are set at whatever level the BOJ wants them to be set at. This is obvious from the real world evidence of the last 20 plus years. Bond investors also do not care for one second about the level of fiscal spending of the government, they just want a risk free, interest bearing place to park their money (which comes from government spending in the first place). Anybody at the Ministry of Finance who doesn't understand such real world facts, but instead believes the fairy tales they learned while getting their useless advanced Economics degrees, should be fired immediately for incompetence and being unqualified for their job.

Exactly as I predicted. Only 7 minutes after my post, Guy informed us all that the Finance Ministry's view on Japanese debt is "complete gibberish", and that only he truly understands Japanese government finances. But then goes on to state something totally in support of what these guys are saying:

Bond investors also do not care for one second about the level of fiscal spending of the government, they just want a risk free, interest bearing place to park their money.

Uh, duh, that is the point -- the more the cabinet keeps making these rosy projections, and the more times they miss them, and have to push targets back, the riskier those bonds become. And, as stated, when that happens, the bond yields will have to rise, and then the whole game is shot. Investors will only accept near zero rates so long as they feel they are, as you say, risk free. And the Finance Ministry is correctly pointing out that Japan will soon approach a tipping point on that if they are not careful.

-1 ( +1 / -2 )

Ministry of Finance is not hawkish, it is more realistic unlike the political office holders. Abe government spending has been getting bigger not smaller. You need smaller government not bigger government to bring down gigantic out of controlled fiscal spending.

With JGBs yields near record low of zero &1% for many years, yet 44% of government spending (less new issuance of JGBs funding) is used to pay outstanding interest payments on JGBs, clearly the debt situation is fragile and is very dangerous. JGBs have been supported by domestic institutional investors, domestic household savings and BOJ QE buying.

All 3 factors can change when institutional investors lose confidence, domestic household savings are used up to absorbed outstanding bonds as pension funds dried up, etc, or global inflation starts heating up and force BOJ hand, etc.

35 years of declining interest rates since 1980, has made many people think and assumed that interest rates will be very low or remain low. For whatsoever reasons if rates go up, Japan will likely be 1st on the risk of debt and financial market crisis.

Seasoned successful traders and investors know, "Expect the unexpected". "There is a season for everything under the sun"; nearly everything goes in a cycle...rates can come down, rates can go up.

1 ( +3 / -2 )

"Once Japan starts running current account deficits, Japan becomes like Greece and is dependent on finance from the international markets for funding and the international markets determine bond yields."

I'll be holding you to that astonishing prediction.

-1 ( +0 / -1 )

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