Japan experts defend Abenomics ‘go for growth’ strategy
Two of the authors of Japan’s new fiscal strategy have defended the decision to “go for growth” as a way out of the world’s biggest public debt problem.
In interviews with the Financial Times, Motoshige Ito and Susumu Takahashi argued it makes sense to assume Abenomics will succeed, rather than doom the stimulus to failure by tightening fiscal policy now.
Their comments highlight hopes that escaping deflation will deliver a massive jolt to Japan’s growth prospects, helping to cure chronic budget deficits, and tackle a gross public debt amounting to 246 per cent of annual output.
“It’s impossible to tackle the fiscal situation if it doesn’t fit with reviving the economy and ending deflation,” said Mr Takahashi, chairman of the Japan Research Institute, and a member of the government panel that will deliver the new strategy by the end of June.
The panel includes prime minister Shinzo Abe and five of his cabinet; Bank of Japan governor Haruhiko Kuroda; and four private sector members including Mr Takahashi and Mr Ito, a professor at the University of Tokyo.
According to people close to the deliberations, there is tension between the finance ministry, which wants to lock in spending cuts as early as possible, and the Cabinet Office — representing Mr Abe — which is determined not to choke off growth.
The fiscal panel has come under fire for its rosy economic projections: they assume growth of more than 2 per cent a year after 2018, implying Japan will expand faster than the US, in spite of its shrinking population.
“Using overly optimistic macroeconomic assumptions as in the ‘revitalisation’ scenario . . . risks harming confidence in the authorities’ ability to restore fiscal sustainability,” said the International Monetary Fund.
Mr Ito acknowledged the forecasts are “very ambitious” but said it was reasonable to expect a rise in growth and tax revenues if Japan escapes from deflation.
The basic argument is that years of chronically low demand in Japan have meant little reason to economise on labour. Once wages rise, and domestic companies have to compete for workers, it could unleash two decades of pent-up potential for productivity gains.
“That is actually the chance we have as a country suffering from lack of demand for 20 years,” said Mr Ito.
It’s impossible to tackle the fiscal situation if it doesn’t fit with reviving the economy and ending deflation
- Susumu Takahashi
Mr Ito said Japan’s solid growth in output per worker does not imply a lack of room for productivity to rise. Low participation in the workforce may flatter the productivity of those who are in jobs, he said.
With consumption tax due to rise from 8 per cent to 10 per cent in 2017, and cheery growth forecasts, the fiscal panel only needs to save another 1.6 per cent of gross domestic product to reach a primary balance by 2020. Primary balance means taxes cover spending, before interest payments.
The fiscal panel intends to lay out a detailed schedule of reforms to healthcare spending. Possibilities include strong incentives to use generic drugs and targeting overcapacity in hospital beds — which encourages doctors to fill them.
“So far, when Japan’s tried to restrain healthcare spending, we’ve used a cap. But the effect of these ceilings never lasts,” said Mr Takahashi. “The Abe administration is trying for structural reform.”
Both Mr Takahashi and Mr Ito say just getting to a primary balance is not enough. Instead Japan needs to get its debt-to-GDP ratio on a downward path.
Japan’s public spending will increase sharply after 2025 as the baby boom generation reaches old age. Mr Takahashi said tax rises will then be necessary “but in order to minimise their size we need to control spending now”.
“When it comes to how we can decrease debt-to-GDP in the long-run, we have to be very realistic. It is not possible to lower debt-to-GDP only by ordinary budget surpluses,” said Mr Ito, pointing out it would take decades of large surpluses to erode the existing debt.
“It is not the issue we are discussing now, but in order to decrease the debt-to-GDP ratio in the long-run . . . there must be more serious discussion of mild inflation — 2 per cent or 3 per cent,” he said.