Japan gets paid to issue debt and yet it has just tightened its fiscal policy!

Today I am looking east to the country which is hosting the rugby world cup and let me congratulate them on their victory over Ireland. But there is another area where Japan is currently standing out and that is the arena of fiscal policy. The current establishment view is that it is time that fiscal policy took up the slack after years and indeed in Japan’s case decades of easy monetary policy. One feature of that type of thought is seen by the cheapness of public borrowing in Japan where the ten-year yield is -0.22% and the thirty-year is a mere 0.35%. So Japan is either paying very little or being paid to borrow right now.

Consumption Tax

Last week it did this.

After twice being postponed by the administration of Prime Minister Shinzo Abe, the consumption tax on Tuesday will rise to 10 percent from 8 percent, with the government maintaining that the increased burden on consumers is essential to boost social welfare programs and reduce the swelling national debt. ( The Japan Times )

This is an odd move when we note the current malaise in the world economy which just gets worse as we note the fact that the Pacific region in particular is suffering. We looked at one facet of this last week as Australia cut interest-rates for the third time since the beginning of the summer.

Things get complex as we note that there are offsetting measures.

The 2 percentage point boost is estimated to inflict about a ¥5.7 trillion burden on households. However, making preschool education free of charge, keeping the 8 percent rate for food and nonalcoholic beverages and beefing up social welfare are expected to lessen that burden to around ¥2 trillion — about a quarter of the ¥8 trillion cost of the 2014 hike, according to the government and the Bank of Japan. ( The Japan Times )

As you can see this takes away a lot of the point of making the change in the first place! According to the government the net effect will be a bit more than a third of the gross. Also it means the government interfering in more areas leafing to transfers of cash from one group to another. Now whilst free preschool education is welcome we have seen extraordinary transfers in the credit crunch era via policies such as negative interest-rates and QE bond buying.

As ever the numbers seem in doubt as NHK News thinks the impact will be larger.

Half the revenue will be spent on making preschool education and childcare free of charge, easing the financial burden of higher education, among other things. The rest will go to restoring the country’s fiscal health.

The economic impact

The very next day Japan’s Cabinet Office released this bombshell.

The Consumer Confidence Index (seasonally adjusted series) in September 2019 was 35.6, down 1.5 points from the previous month.

The Japan Times covered it like this.

A Cabinet Office survey showed earlier this week that consumer sentiment in Japan weakened for the 12th straight month in September, hitting its lowest since the survey started in April 2013……….The index was lower than the 37.1 marked during the first stage of the hike in April 2014.

The last sentence is especially ominous if we consider the impact of the 2014 Consumption Tax rise. If we return to the survey we see from the series that it has been falling since some readings above 44 in late 2017 and the fall has been accelerating. In terms of detail there is this.

Overall livelihood: 33.9 (down 0.9 from the previous month)
Income growth: 38.7 (down 0.8 from the previous month)
Employment: 41.5 (down 0.7 from the previous month)
Willingness to buy durable goods: 28.1 (down 3.6 from the previous month)

So all elements fell and the employment one is particularly significant when we note this.

 The number of unemployed persons in August 2019 was 1.57 million, a decrease of 130 thousand or 7.6% from the previous year…..  The unemployment rate, seasonally adjusted, was 2.2%. ( Japan Statistics Bureau )

As an aside this makes the various natural and equilibrium levels of unemployment look laughable. For newer readers that is demonstrated by the Bank of England thinking it is 4.25% when Japan has an unemployment rate around half that.

This morning has brought news that things have gone from bad to worse.

TOKYO (Reuters) – A key Japanese economic index fell in August and the government on Monday downgraded its view to “worsening”, indicating the export-reliant economy might face slipping into recession.

The outlook was mostly driven by this.

The separate index for leading economic indicators, a gauge of the economy a few months ahead that’s compiled using data such as job offers and consumer sentiment, dropped 2.0 points from July, the Cabinet Office said.

Fiscal Policy

The other side of this particular coin was illustrated by the response of Fitch Ratings to the Consumption Tax hike.

Japan’s consumption tax hike supports medium-term fiscal consolidation efforts, and the country’s sovereign credit profile, Fitch Ratings says. We estimate it will lower Japan’s debt ratio by about 8pp of GDP by 2028; however, very high public debt will remain a key credit weakness.

They further crunched the fiscal numbers here.

Total annual revenue from the tax hike is estimated by the government at about 1% of GDP, half of which is earmarked to reduce debt (the remainder will be used to permanently increase spending for education and long-term care). This would result in Japan’s gross general government debt-to-GDP ratio falling to just over 220% by 2028, from 232% at present.

It hardly seems worth it when it is put like that. Also perhaps unwittingly they let the cat out of the bag as to why Abenomics is so keen on raising the level of inflation.

We estimate that Japan’s public debt dynamics have stabilised due to the resumption of nominal GDP growth in recent years.

Nominal GDP growth includes inflation.


This is a story with several facets so let us open with the driving force of this which was the IMF or International Monetary Fund and the case it made in the earlier part of this decade for Japan to improve its national debt to GDP ratio. Here is the IMF Blog after the 2014 Consumption Tax rise.

Japan’s GDP declined by almost 7 percent in the second quarter, more than many had forecast including us here at the IMF.  Many cite the increase in the sales tax this April for this decline.  But that is not the full story.

That opening suggests there were other reasons for the fall but fails to state them as it then discusses general rather than specific issues. Oh and it does not day but it means annualised fall in GDP. The impact was so great that the 2015 rise was delayed to now rather ironically because of the recession risk. What it means is that Japan ends up doing this at a very risky time if we look at the world economic outlook.

We now find also that IMF fiscal conservatism is being applied just as it has switched to expansionism. That is quite a mess! No wonder Christine Lagarde shot out of the door. After all Japan can borrow quite cheaply mostly due to the fact that The Tokyo Whale ( Bank of Japan for newer readers ) owns so much of it. The IMF has just published a Working Paper on this so let me give you some numbers from 2017.

As shown in the Fiscal Monitor, Japan’s PSBS stands out as one of the largest PSBS in the world, with assets and liabilities of 533 percent of GDP in 2017. Japan’s
PSBS also includes cross-holdings of assets and liabilities within the public sector, exceeding 210 percent of GDP in 2017—the largest in the IMF’s PSBS database. Much of these come from public corporations’ financing of central government liabilities. ( PSBS = Public Sector Balance Sheet)

Next let me help the author out as the situation below is explained by world wide trends accompanied thsi decade by the enormous purchases of The Tokyo Whale.

Several previous studies considered it puzzling that the stock of Japanese Government Bonds (JGBs) has been increasing but their yields have been declining
for the last three decades.

Next we get a higher estimate for the national debt.

However, these may not fully explain why Japan has been able to build up 288 percent of GDP in public sector borrowing.

Also it is not only The Tokyo Whale that has bought this.

In 2017, the public sector finances 150 percent of GDP of public sector borrowing,

In some ways it has been buying off other parts of the public-sector.

For example, the Post Bank
reduced allocations to public sector financing from 95 percent of its total assets at its peak in
1998 to 33 percent in 2017. The social security funds also reduced asset allocations to public
sector financing from 77 percent at its peak in 1998 to 34 percent in 2017.

Oh what a tangled web we weave……

Meanwhile it would appear that even extraordinary fiscal expansionism has not done much good.

Borrowing of general government ballooned in the 1990s and 2000s. It was 60 percent of GDP in 1990 and
increased to 226 percent of GDP in 2017.

The ordinary Japanese may have a job but real wages are falling again and fell at an annual rate of 1.7% in August.




14 thoughts on “Japan gets paid to issue debt and yet it has just tightened its fiscal policy!

    • Hi Chris

      Your point hits an area which someone had just asked about on social media. This is because this is actually deflationary as in aggregate demand in the economy is being reduced and it seems as though the effect will be ~0.5% of GDP. In these times of low growth that might have a major impact especially if there are second order effects.

      It may not be described as deflationary because it will add to inflation. The media and some “experts” have been sold a pup in this area.

    • Hi Forbin

      Well in a sense you are right because Japan has been investing much of its export surplus abroad for years and indeed decades now. At the end of last year it had a net international investment position of 341,556 billion Yen. I doubt the accuracy of the number but it gives not only an idea but also a rationale for why the Yen rises at times of stress, which is that a repatriation of some of the money starts to get priced in.

  1. Great blog and podcast as usual, Shaun.
    A warning light went on in my head when I read your statement about the Bank of England thinking the natural rate of unemployment is 4.25% “when Japan has an unemployment rate around half that”. I remembered vaguely that Japanese estimates didn’t treat workers on layoff awaiting a return to work as unemployed while Canadian estimates did and wondered if the difference wasn’t just a statistical rather than a real phenomenon. I could find only one methodological article on the subject online: Constance Sorrentino’s 1984 study “Japan’s low unemployment: an in-depth analysis.” Unfortunately it relates to US-Japanese rather than British –Japanese comparisons and is 35 years old, but I could find nothing more recent. While Sorrentino found that differences in Japanese and US methods overstated the gap between their official unemployment rates, the difference was small. For the four years 1977 to 1980, adjusting to US methods brought the unemployment rate up by 0.4 percentage points from 2.4% in 1977, when the US rate was 7.8%, and this was the largest change. In 1980, the adjustment only raised the official rate by 0.1 percentage points from 2.2%. Sorrentino specifically tackled the layoff question, noting that: “Under the IL0 standards, persons on temporary layoff are classified as employed if they have a formal job attachment (as determined by receipt of wages or salary or other factors). Persons on layoff with no formal job attachment are classified as unemployed.” She notes that virtually all Japanese workers on layoff would have such a formal job attachment while most American workers would not, so it is really a misperception to see the much larger number share of workers on layoff being counted as unemployed in the American estimates as representing a methodological difference. It is more a difference in the way the two labour markets work. I would be interested in your comments on this as someone who once lived in Japan.

    • Hi Andrew and thank you

      There are some differences as for example JimW has pointed out differences in the structure in the UK and France. Also people question how migrant unemployment has been measured in some of Europe. So in reply I have taken a look at the ILO database which tells us that Japan in 2018 had an unemployment rate of 2.5% which is consistent with the official Japanese series. Canada was 5.9% and the UK 4% so any differences minor.

      As to working out there it was 20+ years ago but there was a definite employment culture. For a while I both lived and worked at the Ark Mori square in Tokyo and next to it was a 3 level highway ( the crowding was a shock to even a Londoner like me). Across it were various walkways and people were employed to count you. What a boring job! Also the shops in Ginza ( the main shopping district) had girls/women to operate the lifts and so on….

  2. I just cannot quite work out the BOJ or the Japanese government for that matter, a key feature of their approach to economic policies following the bursting of their real estate bubble post 1990 was that every time a recovery was even sniffed, they would immediately apply the brake in some form or other via an increase in consumption tax or some other tax that would immediately snuff out the recovery. It was not that this happened just once, they did it again and again, and here they are now again applying the brakes once the 1000 ton freight train has just moved away from the buffers, it is totally perplexing to me and I gave up years ago trying to work out what hey were trying to achieve.

    • Hi Kevin

      It is feast and famine stuff. We have ended up with extraordinary monetary policies but the fiscal numbers are extraordinary too. But they never seemed to adjust to the fact that things have changed and keep applying the same failed tactics. The success for Japan are really due to its culture much more than the central planning although the two do crossover at points.

  3. Hi Shaun

    Japan’s population is aging rapidly and this must have an effect on growth that i significant. If you take trend growth as growth in population plus productivity the figure for Japan could be quite low. Furthermore spending tends to decline from 55 onwards so it isn’t just a question of retirees.

    This aging and the fall in consumption could precipitate deflation which of course will do little for debt dynamics. It’s also means greater fiscal spending.

    Amidst all this you would have thought that interest rates would go up but that hasn’t occurred as you say and is something of a puzzle but the BOJ buying everything in sight must surely have something to do with this.

    • Hi Bob J

      For once the words of a central banker are not weasel ones as “Yield Curve Control” has done exactly that. Although as I have pointed out it unintentionally kept yields higher than otherwise for a while. Volumes have dropped and the Japanese Government Bond market is mostly The Tokyo Whale,

  4. Pingback: “1984” | Wild's Crew

  5. Pingback: Japan Gets Paid To Issue Debt And yet It Has Just Tightened Its Fiscal Policy! - Free World Economic Report

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