The Bank of Japan
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In the November issue of the monthly magazine Bungei Shunju, Vice Finance Minister Koji Yano warned about the possibility of financial collapse. He declared that the political world was participating in a “scattered battle” and that “it is similar to watching the Titanic head into an iceberg.”
The controversy over his comment offers an excellent opportunity to take up this discussion. Experts in government, finance, and the media are disputing whether to prioritize fiscal adjustment or economic revitalization, and it is essential for the country to choose the best solution.
I stand in opposition to Mr. Yano on financial theory, but would like to commend him for speaking up.
Why is this? It can be said that high-ranking officials of the Ministry of Finance have been negotiating covertly with politicians, business dignitaries, scholars and economists, and even the press. They have mind-controlled these people into thinking more like the ministry.
However, it is problematic that the process for formulating policies that will heavily impact the national economy and citizens’ daily lives is so opaque.
The Ministry of Finance manages about 50% of the gross domestic product (GDP), including the general and special accounts. Politicians are eager to secure funds for the budgets of various businesses in their constituencies, while the business world advocates for corporate tax cuts, and universities are concerned about research budgets.
Some scholars are aiming for a seat on economic advisory boards by advocating for “fiscal balancing.” Most reporters cannot write complex economic articles without briefings from the financial bureaucracy.
I have consistently opposed increases in the consumption tax while the economy is experiencing deflation. And I have spoken many times with senior treasury officials when they visited the Sankei Shimbun.
Whether newspapers are subject to the reduced consumption tax rate is a serious concern for newspaper management, but Sankei allows me to write freely. This is because controlling free speech signals the death of the media.
Background of the Consumption Tax
Since the consumption tax hike and fiscal austerity that the Ryutaro Hashimoto administration launched in 1997, Japan has fallen into chronic deflation. Not only has the annual average economic growth rate continued to stagnate at around 0%, the fiscal balance has also been on track to deteriorate.
I have shown this fact with data, but officials at the Ministry of Finance have not provided any comment or refutation. Instead, they repeat that “securing financial resources for social security necessitates consumption tax increases, and we appreciate everyone’s understanding.”
It is a gloomy prospect that this is coming from those who are supposed to be Japan’s “best and brightest.”
Respect for Yano’s Approach
Mr. Yano is different. The wrath of the government and the ruling party could put his position in jeopardy, but he showed the workings of the Ministry of Finance anyways. He has shown willingness to face a storm of criticism by so-called reflationists.
His motivation likely comes from his anger at his superiors’ and colleagues’ interpretations of politics. In the Moritomo Gakuen incident, they falsified official documents and obediently complied with requests such as one for a large supplementary budget to be approved on the spot.
“They are tax thieves who are profiting from the taxpayer’s money,” Mr. Yano voluntarily said in his contribution to the Bungei Shunju. This mentality from a public servant is good.
However, what is truly shameful are the severe mistakes that successive administrations have made in trying to balance fiscal policy that have only led to unproductive results.
In his contribution, Yano warns of a crisis coming from financial collapse, arguing that allowing spending to continue increasing even while general account tax revenues are not growing will lead to a “crocodile’s mouth” — that is, a growing gap between government spending and revenue.
In Japan, the declining birthrate and aging population mean that economic expansion is impossible to achieve by increasing tax revenue alone.
Yet, these austerity measures may have caused the national economy to shrink, deflationary disease to become chronic, and the essential fiscal balance to deteriorate. Furthermore, hard-working people have been making sacrifices and saving with financial assets such as cash and deposits. There is little investment demand by companies that have given up in the midst of shrinking domestic demand.
Just as Japan has used its shrinking funds for the government deficit, China has been delighted by these trends, turning to overseas financial markets to depress interest rates on the dollar and raise significant cash reserves in US dollars.
The graph shows this reality. At the end of 1997, when chronic deflation began, and in June 2021, the net financial assets by sector (with negatives as net liabilities) of government and international liabilities have been supported by household net assets. During this period, household net assets grew by ￥758 trillion JPY ($6.66 trillion USD), general government net liabilities grew by ￥567 trillion JPY ($4.987 USD), and overseas debts rose by ￥261 trillion JPY (about $2.3 trillion USD).
By the principles of capitalistic economics, assets can only increase when deficits increase. In a deflationary Japan, the government’s debts are increasing household assets. Total household assets are large, and are able to support not only government debt but also overseas debt. Such a country cannot be like the Titanic on the verge of collapse.
What is important is that Japan, which holds a large quantity of money, will issue government bonds and make investments for the future to serve as a stimulus for private demand. This time, now, when the interest rates for government bonds are zero, is our chance.
I am eager to see how Vice Minister Yano responds.
(Read the Sankei Shimbun column in Japanese at this link.)
Author: Hideo Tamura
