I’ve already written about the possibility of the problem starting in France or the United Kingdom. Today, let’s consider Japan.
Here’s the key data for the country. At first glance, it does not seem as if government spending is growing rapidly. But in a nation with shrinking population and low inflation, the net effect is that there has been an increase in the fiscal burden of government.
The good news – at least relatively speaking – is that government spending in Japan is lower than in France and the United Kingdom. And it’s also not growing as fast.
The bad news is that Japan has a higher debt burden. Though Japan is one of the nations where net debt is much lower than gross debt, so that should lower the risk that bond vigilantes will visit.
That being said, it is not a good sign for a nation if it’s interest rates (light blue) are higher than the average (black). And this chart shows Japan is in that unfortunate club.
The Wall Street Journaleditorialized back in January about Japan’s shaky fiscal position.
Here are some excerpts.
Tokyo’s problem—and the real reason for the bond vigilantes to ride into town—is that…Japan has developed a habit of throwing cash hither and yon to no good effect other than to accumulate debt. We count roughly 20 stimulus packages since 1992, in the form of “supplementary” budgets. These include ¥98 trillion during the 1990s, spent on a combination of roads and bridges, social spending and bank bailouts. In the 2000s, it was ¥42 trillion in government spending on cash handouts to households and various schemes to subsidize household purchases of big-ticket items. In the 2010s, there was ¥111 trillion for reconstruction after the 2011 Fukushima earthquake and tsunami, a round of public-works spending, and a new batch of handouts… None of this created much economic growth. But it did amass debt equal to 250% of GDP, up from about 63% when the bubble burst in 1990. That statistic is telling: If all these stimulus efforts had spurred economic activity, GDP growth would have outpaced the accumulation of debt. Instead, debt service consumes one-quarter of the government budget—¥28 trillion ($178 billion) in fiscal 2025 for interest and redemptions combined.
Moreover, Japan is willing to use ineffective monetary policy to match ineffective fiscal policy, as Desmond Lachman explained last month for the American Enterprise Institute.
…the BOJ confirmed the market’s view that it is a central bank that can be counted on to do too little too late. This does not bode well for the Japanese yen and by extension the US Treasury bond market. …A further reason to be concerned about the BOJ’s timidity is that it is occurring against the backdrop of the sorry state of Japan’s public finances and considerable weakness in the Japanese government bond market. At a time when Japan’s public debt is at around 230 percent of GDP, Takaichi shows no sign of backing off her proposed fiscal policy stimulus. Meanwhile, Japanese government bond yields have spiked to multi-decade highs. The BOJ’s relative policy passivity could heighten market fears that Japan might try to inflate its way out of its debt problem.
I’ll conclude with some sort-of good news.
According to the Economist, Japan may have the highest net debt of G-7 nations, but it also does not need to do much to keep that debt from increasing.
Especially when compared to countries like France and the United States.
For what it’s worth, the fiscal goal should be reducing the burden of government rather than to “stabilise debt.”
But the above data can be a helpful way of comparing national fiscal policies.
That does not bode well, especially if Japanese politicians think they can solve their problems by having the tax burden increase faster than the spending burden.
