From Foreign Policy, December 16:
Sanae Takaichi’s massive spending program could be a risky political win.
Recently elected Japanese Prime Minister Sanae Takaichi has proposed an ambitious 21 trillion yen ($135 billion) spending program that puts new stresses on already heavily overdrawn government coffers and raises the specter of a Liz Truss-style market shock. For international investors, it adds further uncertainty, but for the Japanese bond market, it is déjà vu all over again.
The plan fulfills Takaichi’s campaign promise of a “proactive fiscal policy” that is designed to bring Japan out of its long stupor since the collapse of the bubble economy back in 1990. Taking note of public opinion polls, a major part of the spending will be intended to help people cope with higher prices through various subsidies rather than taking more painful steps to control inflation itself.
While still low by global standards, Japan’s inflation rate of around 3 percent is being felt by consumers, especially since much of the increase comes in higher costs for food, up 6.4 percent in November compared to levels one year ago, including a 40.2 percent increase in the price of the daily staple of rice. Takaichi has proposed measures that include subsidies for electricity and gas bills as well as cash handouts for households with children.
In addition, she wants to make targeted investments in sectors such as semiconductors and shipbuilding, plans that recall the glory days of Japan’s state economy in the 1950s and 1960s, when the powerful Ministry of International Trade and Industry played a key role in the economy—and arguably helped to create the postwar “economic miracle.”
While few would argue with the hopes for a fast-growing Japanese economy, there seems to be little reason to think that Takaichi will succeed where all her predecessors have largely failed. Prior attempts at fiscal stimulus, especially ones attempted in the 1990s with a focus on big infrastructure projects, did little for overall economic growth while pushing the debt load consistently higher.
Despite regular lip service to the idea of “fiscal responsibility,” administrations through the past 30 years have found it easier to spend than to save. The government debt load has soared from just 48 percent of Japan’s annual GDP in 1980 to a peak of more than 258 percent in 2020, according to data from the International Monetary Fund (IMF). By contrast, the much-debated U.S. debt load is at 125 percent of GDP, according to the IMF.
Takaichi has said that her additional spending will not be a problem, since it will create higher growth and therefore higher tax revenues.
“As we build a robust economy and raise our growth rate, we will reduce the government debt-to-GDP ratio, realize fiscal sustainability, and ensure the confidence of the markets,” she confidently predicted when she rolled out the program in late November.
Markets have been skeptical, and analysts have been quick to compare Takaichi’s claims with the debacle that resulted from a similar attempt by British Prime Minister Liz Truss in 2022. Soon after taking office, Truss announced a robust spending package that she claimed would be a cure-all for all that ailed the economy. The market reaction was quick, with a sharp fall in the value of British government bonds and quick market intervention by the Bank of England, followed by Truss being rapidly ejected from office by her own party.
Such talk of a looming Japanese debt crisis is far from new. As the debt burden has steadily marched into ever higher record territory over the past 35 years, there have been regular, well-reasoned forecasts of how a debt burden that is the highest ever recorded by a major economy (Britain came close during the Napoleonic wars and just after World War II) would create a panic in government bonds. The markets are still waiting.
Through this period, Japan also had among the world’s lowest interest rates, making the debt less expensive to service. This dichotomy prompted one of the most memorable comments on Japan, made by a clearly frustrated Willem Buiter, then the chief economist for Citigroup, who mentioned Japan at a New York meeting in 2010, when the debt level had reached 220 percent of GDP. “Japan is the hardest economy in the world to understand,” he said. “If this were physics, then gravity wouldn’t work in Japan.”....
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