MOF: Crying Wolf for a Half-Century
Predicting a Government Bond Crash since the 1970s
The first cry of “wolf” came in 1975 when, during the post-oil shock recession, Japan did what countries do in recessions: it ran a deficit. Nonetheless, the Ministry of Finance (MOF) issued a “declaration of fiscal emergency.” Three years later, as deficits continued, the MOF said that, unless Japan quickly restored budget balances, it would “collapse.” In 2010, it told Prime Minister Naoto Kan that, unless he raised the consumption tax, Japan could experience a catastrophic debt crisis like the one wracking Europe. So, when Vice Finance Minister Koji Yano publicly criticized Prime Minister Fumio Kishida’s budget package and claimed that deficit spending was like “the Titanic heading into an iceberg,” he was simply continuing a long tradition.
The purpose of these scare stories—which have never come true—is to get Prime Ministers to follow the MOF’s dictates about cutting spending and raising taxes. Officials have even joked about how many Prime Ministers it had to “sacrifice” to introduce and repeatedly raise the unpopular consumption tax.
Because the economy has become overly dependent on repeated injections of fiscal stimulus to make up for weak private demand, the MOF has been unable to impose as much fiscal austerity as it wanted. Still, spending cuts have been tougher than many realize, especially on the elderly.
The MOF argues that, on its current path, aging will compel the government to spend larger and larger portions of GDP on social security and healthcare. The numbers tell a different story. Outlays for the elderly rose until they hit a peak of 12.5% of GDP in 2013, and then they flattened. The figure was 12.4% in 2019. How did this happen? As pointed out by Professors Mark Bamba and David Weinstein, even though there were more elderly, the government cut spending per senior. An update of their numbers shows that social security per pensioner plunged by a fifth from its 1996 peak of ¥1.92 million ($17,000) to just ¥1.49 million ($13,200) in 2019. Healthcare was slashed by 15% from ¥520,000 ($4,600) in 1999 to ¥440,000 ($3,900).
Why have the MOF forecasts of a debt crisis been so wrong for so long?
The reasoning offered by the MOF offers sounds plausible: the ratio of government debt to GDP keeps mounting; that cannot go on forever; eventually, investors will panic. The problem is that the MOF is talking about “gross” government debt (mostly JGBs), which increased from 70% of GDP in 1990 to 237% in 2020. That, however, is a meaningless number because it includes debt that one government agency owes to another. The Bank of Japan (BOJ) is not about to dump JGBs. What really counts is the “net” debt, i.e., the debt held by private investors, and that has plummeted in the era of “Abenomics.” In the name of fighting deflation, the BOJ has bought up almost half of all JGBs, an amount equal to 94% of GDP. That’s up from just 18% in 2012. By contrast, JGBs owned by others, mostly private investors, tumbled from 145% of GDP in 2012 to 103% today (see chart above).
No one denies that Japan’s chronic deficits have consequences. The impact, however, is not a JGB crash but continued slow corrosion of the economy. That difference in diagnosis requires a very different prescription.
Effective reform requires that taxes, spending, and other policies be harmonious with growth, so as to expand the tax base. There are some countries where a consumption tax is fine, but Japan is not one of them. That’s because it makes weak consumer demand even weaker. Other, better taxes are available. On the spending side, paving over riverbeds and providing credit guarantees for zombie companies not only depresses growth but make the public distrust any kind of tax increase since it feels the money would be wasted.
To see my full article in Toyo Keizai, click https://toyokeizai.net/articles/-/500817 for Japanese and https://toyokeizai.net/articles/-/502296 for English.