Japan's shaky deficit solution
Japan's shaky deficit solution - Business Asia by Bloomberg - International Herald Tribune
WEDNESDAY, OCTOBER 26, 2005
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real
GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
WEDNESDAY, OCTOBER 26, 2005
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real
GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
The Japanese government is cutting spending and increasing taxes to deal with its long-term budget and debt woes. The strategy is far from certain to succeed as Japan nurtures a fragile economic recovery and tries to end a stubborn, decade-long bout of deflation.
The higher levies include a gradual rise of 5 percentage points in Social Security payroll taxes and the rollback of a personal income-tax cut enacted in 1999.
Contrast these actions with those of President George W. Bush, who has rejected higher taxes to close the long-term gap in Social Security finances. Meanwhile, the Bush administration is still trying to extend a variety of temporary income-tax cuts in the face of serious projected long-term fiscal imbalances.
Bush has proposed some spending cuts, though most have been rejected or ignored by Congress at the same time that spending has soared for many domestic programs, for the wars in Afghanistan and Iraq and in response to hurricane disasters.
Japan's problems are at least as big as those facing the United States. Its budget deficit is about twice as large relative to the size of its economy. Japanese debt is equivalent to about 160 percent of gross domestic product, or more than four times the level of debt owed by the United States.
That daunting reality is partly mitigated by Japan's high personal savings rate, which allows its government debt to be financed domestically. Much of the U.S. debt is held by foreigners, including the central banks of Japan, China and other East Asian nations.
The principal problem is the deflation that has dogged the economy for much of the past decade.
It is not just that real economic growth has been stagnant or worse over the past 10 years. With prices falling, nominal gross domestic product has also gone down, and with it, the incomes and spending on which taxes are based.
Paul Sheard, chief economist for Asia at Lehman Brothers, said in an interview that since the end of 1997, nominal GDP in Japan has declined 2.5 percent while real GDP has increased 7.3 percent.
Over the same period, nominal GDP rose 46 percent in the U.S. and real GDP climbed by more than a fourth.
"At the moment, Japan remains in a deflationary trap," Sheard said. "It needs a real kick in the pants to get it out of deflation." Instead, the country "is only edging slowly toward an exit."
The deflation has had a devastating impact on the budget.
For example, government tax receipts, which were running around ¥60 trillion, or $522 billion, in the early 1990s, had fallen to just over ¥40 trillion by 2004 and are not expected to be much higher this year. With spending expected to exceed ¥80 trillion this year, the government will have to finance more than half its budget with borrowing.
The government's goal is to achieve a so-called primary balance in its budget seven or eight years from now. That is, to have tax receipts at least equal to spending on everything other than interest payments on debt.
At that critical point, if the average interest rate paid on the outstanding government bonds is lower than the growth rate of nominal GDP, the debt-to-GDP ratio would begin to fall.
The government assumes that deflation will end soon, and that real growth will be strong enough that nominal GDP will be increasing at a 3.5 percent to 4 percent annual rate within a couple of years and continue at that pace indefinitely.
Even if that assumption turns out to be correct - and some analysts in Japan regard it as overly optimistic - tax receipts might still be too low to achieve the target of a primary budget balance.
Mikihiro Matsuoka, a senior economist at Deutsche Securities, said in an interview that it would take a "minimum of a two percentage point increase in the value-added tax" and more spending cuts, in addition to the other actions planned, to reach a primary budget balance on the government's timetable.
Kiichi Murashima, an economist at Nikko Citigroup, agreed with that assessment, and added that Prime Minister Junichiro Koizumi "has promised not to increase the consumption tax."
The issue of an increase in value-added tax will have to be decided late next year, presumably by Koizumi's successor, if the prime minister steps down next fall, as he has said he will, according to Murashima. Any increase would become effective in 2008, he said.
This sort of timetable assumes that the economic expansion, which has run for several years, will continue without interruption. In particular, it assumes that the planned tax increases will not dampen consumer spending enough to cause a recession.
Japanese economic growth also remains vulnerable, in Murashima's opinion, to an economic slump in the United States.
"If U.S. growth slowed to 2.5 percent next year, Japanese growth would slow to 1 percent," he said. "The yen likely would appreciate and exports would not grow strongly in that case."
Matsuoka is more optimistic. He expects Japanese growth next year and the year after to be about 2.5 percent, only slightly less than the 2.7 percent increase last year. And that should be fast enough to lift prices, as measured by the GDP deflator, in 2007.
So even if all goes really well for Japan, it is going to be a long slog before the government begins to fill the huge hole in its budget and halt the rapid rise in its debt. If things take a notable turn for the worse, they might just explode.
posted by Marcel at 2:22 PM
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