Japan: The Third Way?

As its population ages, Japan should carve out a middle way between the social security systems of Scandinavia and that of the US, this at least is the opinion of finance minister Sadakazu Tanigaki, one of several contenders to replace Junichiro Koizumi as prime minister.

At the moment, benefits and tax payments were out of kilter ..“Japanese people are enjoying excessive benefits with a low [tax] burden, and passing on their debts to their children and grandchildren.” If Japan wanted to maintain mid-level benefits, its people would have to shoulder a mid-level burden, he said, referring to the fact that the population began to decline last year. “We need to engage in a nationwide debate on reform of the tax system as a whole, including consumption tax.”

In fact none of this will constitute a 'free lunch', and Japan now faces some hard. even stark, choices. One little commented point is that as interest rates were raised if deflation were to end (which I don't actually think it is about to) the Japanese governement would begin to incur ever larger service charges on that enormous debt it has. Which is one more reason the politicians are in no hurry to see the BoJ end the 'easing policy'.

This Seems To Be Important

The Japanese finance ministry seems set to unveil plans to cut new government bond issuance by more than 10 per cent - to below Y30,000bn ($258bn) - in the year to April 2007. The Financial Times has the story. They had better hope they are reading the situation aright, since if they aren't they are heading straight back into recession. This is what all the battle with the BOJ is about. 2007 is rapidly getting pencilled into my diary as an economic annus horribilis.

Mr Koizumi considers that the economic recovery, about to enter its fifth year, is robust enough to withstand a mild fiscal contraction, although he on Monday came out against a consumption tax increase for at least two years.

Sadakazu Tanigaki, the finance minister, said: “I think we can break down the barrier of Y30,000bn.”

Japan has been running a budget deficit of about 6 per cent of gross domestic product, including interest payments on public debt of about 150 per cent of GDP. Mr Tanigaki is keen to accelerate the process of regaining primary fiscal balance, before interest payments, by the first years of the next decade.

The finance ministry will make cuts by, among other things, trimming payments made to doctors and further bearing down on public works spending, which has fallen by a quarter since Mr Koizumi took office in 2001.

Right Royal Row Over the BOJ

Things down at the Bank of Japan are hardly calm these days. On one version of events (see yesterdays Tankan) Japan is about - finally - to emerge from deflation, and the BoJ naturally enough wants to 'normalise' monetary policy. The politicians however are non-too clear about this:

"Japan’s ruling Liberal Democratic party will on Thursday urge the Bank of Japan to tie its monetary policy to nominal gross domestic product in an effort to lock in the central bank’s ultra-loose monetary stance for as long as possible."

"The proposal, which marks an escalation in tension between Japan’s politicians and the independent central bank, aims to stimulate above-trend economic growth for up to five years."

Japanese Third Quarter Growth

Well here it is, all coming home to daddy. The Japanese data I mean. Third quarter annual growth in Japan has just been revised down from 1.7 to 1%. This is coming home to daddy, since I continue to believe that - for demographic reasons - we will not see a self-sustaining Japanese recovery. Japan will continue to be dependent for growth on China, the US and Europe. Hence weaker than expected data should hardly be surprising.



Gross domestic product was up only 0.2 per cent on the quarter in real terms, with an annualised rate of 1 per cent. The new figures show that growth has been slower than expected, and significantly lags behind the pace in the first half of the year. The government had previously estimated quarterly growth of 0.4 per cent in the three months to September and 1.7 per cent growth on an annualised basis.