The sudden resignation of Japanese Prime Minister Shinzo Abe has led to assessments of his so-called Abenomics.
Many have praised Abe’s aggressive monetary policy because the Bank of Japan’s long shopping list (government bonds, corporate bonds, ETFs, and real estate investment funds) inflated both stock and market prices. ‘real estate (Shirai 2020; Financial Times 2020). Concerns remain on the budget side, as Abe’s consumption tax hikes from 5% to 8% in 2014 and 10% in 2019 are widely seen as a failure (The Economist 2020). Indeed, Abe only solved Japan’s deep fiscal problems superficially.
Figure 1: Japanese central government tax revenue
Source: Ministry of Finance, Japan.
At the heart of the problem is the cheap currency issued by the Bank of Japan, which triggered a stock and property bubble in the second half of the 1980s. As the bubble inflated tax revenues, its burst was followed by a unprecedented economic slump in which corporate tax and income tax revenues fell from 43 trillion yen (about 390 billion dollars) in 1990 to 23 trillion yen (about 185 billion dollars). in 2012 (Figure 1), when Abe took office.
Figure 2: Social security expenditure and local attribution tax as a proportion of total tax revenue
Source: Ministry of Finance, Japan. Central government.
At the same time, the aging of Japan’s population has pushed up the government’s contributions to the public pension and health insurance system, from 12 trillion yen (about 110 billion dollars) in 1990 to 36 trillion yen ( approximately $ 327 billion) in 2019. In addition, the alleged local allocation tax subsidies of approximately 16 trillion yen per year (approximately $ 145 billion) to the economically depleted Japanese periphery continued to be a heavy burden for the central government. In the wake of the global financial crisis, the two together had grown well beyond central government tax revenues (Figure 2).
Persistent funding gaps could not be closed due to political and economic constraints. The reduction in social benefits and local tax allowances was considered political harakiri because the elderly population is concentrated in the Japanese periphery where the power base of the ruling Liberal Democratic Party is. In this never-ending crisis, the government could not impose a heavier tax burden on companies and employees.
Therefore, the only way to increase revenue was to lift the consumption tax, which was only 3 percent in 1990, when the crisis erupted. But even this approach was tricky as Japanese voters dislike taxes and tax increases were seen as a threat to the economic recovery. Thus, the only politically feasible solution to the problem was to increase the debt, with Japanese general government debt rising from 67% of GDP in 1990 to 240% in 2019 (Chart 3). The Bank of Japan avoided a government debt crisis by voluntarily buying huge amounts of government bonds. This gradually reduced the long-term interest rate to zero (Chart 3), thus keeping public interest rate payments under control.
Figure 3: Japan: long-term interest rate and general government gross debt
Source: Ministry of Finance, Japan.
Although consumer price inflation has not resumed despite the huge monetary expansion, the Bank of Japan’s great appetite for government bonds has not been a free lunch. The costs of long-term ultra-loose monetary policy have emerged in the form of crippled economic growth as persistently low interest rates have zombified much of the Japanese economy, especially in remote areas of Japan. . With productivity growth trending down, real wages have been declining since 1998 (Murai and Schnabl 2019). The bleak economic outlook for much of the younger generation is pushing them to refrain from having more children. While many young people move from the periphery to the metropolitan areas to find employment, the periphery is aging faster. Many small and medium-sized businesses go bankrupt for lack of customers.
In this vicious cycle, Abe’s consumption tax increases were only an incomplete recharge of lost tax revenue due to self-imposed stagnation. At the same time, the huge social security spending surplus was simply monetized by the Bank of Japan to the detriment of the general welfare and economic prospects of Japanese youth. The recent corona crisis is likely to reverse the recovery in tax revenue, which has taken place under Abenomics. Therefore, Abe’s successor Yoshihide Suga will have to come up with new ideas if he aims to revive the Japanese economy.
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