Japan’s Debt Debate: Is It Heading for a Titanic Crash?
Top finance officials seek balanced budget, likening the nation to a ship heading for an iceberg, but Abe camp says deficit is misunderstood
TOKYO—When Japan’s leader released his economic vision Tuesday, he left out an important date.
Prime Minister Fumio Kishida deleted a pledge from earlier government statements calling for Japan’s budget to be balanced by 2025. And he declined to give a date by which Japan would do something to lower its government debt, while promising to significantly increase military spending.
It is a bold stance, given that the debt tops ¥1.1 quadrillion or $8.3 trillion at current rates, more than twice the size of the economy. The omission marks a high point in the influence of a group within the ruling Liberal Democratic Party that has embraced a view attributed to former U.S. Vice President Dick Cheney: “Reagan proved deficits don’t matter.”
Many countries added heavily to their debt during the Covid-19 pandemic and a global debate is under way about whether they need to cut back now. Japan’s experience is likely to be instructive because it has the highest government debt among leading economies and at the same time one of the most powerful factions arguing that the world’s understanding of debt is flawed.
This camp, led by former Prime Minister Shinzo Abe, says Japan has room to spend a lot more—including on its defense budget to counter China. The other side of the argument is spearheaded by a vice finance minister who says the country is like the Titanic, heading for a massive iceberg of debt.
Some members of the free-spending group have embraced a maverick American economic school of thought known as modern monetary theory, or MMT. It says countries that issue debt denominated in their own currency, like the U.S. and Japan, won’t ever need to default on debt because they can simply print more currency to pay it back.
“Trying to achieve fiscal balance is meaningless per se,” said Shoji Nishida, a member of Parliament’s upper house from the Liberal Democratic Party who keeps a book by American MMT guru Stephanie Kelton on his desk. “The reason Japan is in a mess is because of the mistaken view by the Ministry of Finance that there is a limit to fiscal resources.”
In recent speeches, Mr. Abe has echoed such theories. He described the central bank, the Bank of Japan, as a subsidiary of the government and said any expiring government debt could simply be rolled over into new debt. The Bank of Japan already owns nearly half of the government’s debt.
This debt downplaying—or denial that it is really debt at all—alarms others in the ruling party and career officials at the Ministry of Finance.
They say every yen spent by the government ultimately has to be recouped through taxes or other revenue—in other words, that outsize borrowing can’t go on forever. Now that the worst of the pandemic is over, they say Japan needs to rein in debt soon.
Last fall, vice minister of finance Koji Yano published an article in the monthly magazine Bungei Shunju denouncing the MMT-oriented camp and comparing Japan to the Titanic.
“I don’t know how far until we crash into it, but we can be sure that Japan is barreling toward an iceberg,” Mr. Yano wrote.
More recently, the weak yen—which fell to another 20-year low against the U.S. dollar this week—has added to concerns that relying on the Bank of Japan to buy government debt at low interest rates could undermine confidence in the currency.
Mr. Nishida, the MMT advocate in the ruling party, called Mr. Yano a con artist, saying he was trying to scare people to preserve the ministry’s longtime power over the nation’s purse strings. Mr. Yano declined to comment through a spokesperson.
Mr. Yano’s argument has won support from many in the ruling party, including former Finance Minister Fukushiro Nukaga.
“I believe it is our role and responsibility to maintain trust in our finances and trust in the currency,” Mr. Nukaga said in an interview.
He said Japan would eventually need to look at raising its national sales tax, which currently stands at 10%. An increase “could actually promote greater consumption by erasing worries about the future,” he said.
Mr. Nukaga leads a ruling party study group that has competed with another group, led by MMT advocate Mr. Nishida. Their tussle came to a head in recent weeks as the Kishida government weighed whether to uphold earlier pledges to get the budget into primary balance by 2025. Primary balance means outlays match revenue, excluding interest payments on government debt and revenue from new issuances.
The final language nodded to the need for healthier finances but mainly sided with the free-spending camp by leaving out the 2025 date. That clears the way for a generous increase to the defense budget next year. Eventually the ruling party wants military spending to reach 2% of gross domestic product, nearly double the current proportion.
MMT advocates say that while governments such as Japan’s have no limits on issuing debt, they do have to deal with the risk of inflation if spending outweighs the economy’s capacity to produce goods and services. Japan’s overall inflation hit 2.5% in April, the highest rate in three decades.
That figure is well below the 8%-plus inflation in the U.S. and it hasn’t deterred the pro-spending faction. It blames Japan’s inflation on the high cost of imports such as oil and gas and it says new spending on defense isn’t likely to overstress the nation’s productive capacity.
Mr. Abe, the former prime minister, “is now a full-throated proponent of deficit spending,” wrote U.S.-based Abe biographer Tobias Harris in a recent commentary. “If the government can continue to run large deficits, then the government does not have to grapple with a guns or butter trade-off.”