Issues Facing the Japanese Economy in 2013 (January 2013)

Learn from the Mistakes of Others Instead of Sitting on the Sidelines and Considering them as Someone Else's Problem

Faculty Fellow, RIETI

A tale of two married couples

Here is a tale of two married couples, both of whom are deep in debt and have to cut down on household expenses as their incomes have declined.

One couple struggles to come to an agreement on how much to spend on which expenses, and has to have the same discussion every year, as the husband's and wife's priorities are in conflict with each other. Since this couple has established a rule that nothing can be spent unless they both agree on it, water and electricity may be stopped, the children may not be fed, and stores in their neighborhood where the couple shops on credit are worried whether or not they will get paid. This couple causes extreme difficulties to those around them, and around the same time every year, a stalemate in their marital argument occurs over the same issues.

As for the other couple, the husband has the authority to make the final decisions on spending, but it is the wife who really knows what is in the couple's wallet. The wife always complains of financial hardship. However, if the husband says, "If the economy is bad, we should go out and eat something delicious to cheer ourselves up and get it going," then she will reluctantly find the cash from somewhere, saying, "Honey, this is the last time, OK?" They also repeat the same thing every year, and it is a wonder that they haven't gone broke yet. Yet, this couple does not bother those around them, as they always buy things with cash. Nevertheless, there is a rumor that if they ever go broke and have to sell their beautiful furniture and state-of-the-art home appliances, etc., their neighbors will secretly plan to bargain these things down to cheap prices.

Perhaps these stories aren't perfect examples, but the former is meant to describe the fiscal situation of the United States, while the latter suggests that of Japan. Although the possibility of a full-scale financial collapse is a domestic and international concern for both countries because of the debt that each government has accumulated, the impact of the fiscal problem on their actual economies is viewed differently. While the "fiscal cliff" problem in the United States is dealt with as a serious concern for the global economy, with respect to Japan, the continuing low yields of Japanese government bonds (JGBs) are reported as a mysterious phenomenon. In fact, Japan's fiscal situation is much more serious than that of the United States. Therefore, it is more important to project what will happen to Japan if things continue as they are, instead of sitting on the sidelines and viewing the situation in the United States as "someone else's problem."

The importance of making information transparent and visible

First, although the Democrats and Republicans have the habit of repeating the similar fiscal debate every year, which is certainly a nuisance to others, at least the United States is in a situation where the parties recognize that a problem exists and are prepared to sit down at the bargaining table. In Japan, on the other hand, both the ruling and the opposition parties actually do not want to avoid serious fiscal consolidation because of the election, although both claim to recognize the importance of fiscal reform in their rhetoric. Second, in the United States, the amount of debt the government has currently incurred and the amount of spending and tax revenues expected in the future are at least clear. In Japan, in contrast, it has become hard to figure quantitatively the amount of necessary spending and the seriousness of the fiscal situation, as its fiscal investment and loan program and pension system have become extremely complicated. This has also given the politicians a reason and incentive not to bother looking into the seriousness of the fiscal problem. In other words, as a result of repeatedly fiddling with these systems through various piecemeal measures, even bureaucrats—those who are supposed to be familiar with these systems—now have only a shaky grasp of the situation, particularly the state of the pension system.

Making fiscal reform an obligation instead of a non-binding target

Of course, the United States is also facing a serious problem. As it has a sort of built-in stabilizer, spending is automatically reduced when the fiscal situation deteriorates, having far-reaching ramifications on areas that would be unthinkable in Japan, such as the police force, firefighters, and compulsory education. Provided that there is no difference from Japan in other aspects, this system, which would automatically cut spending in areas directly related to the safety and security of people's lives, cannot be considered superior as a whole. However, it has its merits in that the public is forced to become aware of the seriousness of the fiscal problem through its own experience.

In Japan, in contrast, if the country finds itself in a situation that requires a serious reduction of spending on compulsory education, the police force, and firefighters, it means that it has already passed the point of no return and is in a dire situation. A system in which people feel some pain before suddenly discovering that they have run into an irrevocable crisis without any advance notice is beneficial in its own way. Therefore, I would argue that it is no longer enough for Japan to make fiscal reform simply a non-binding "target." To prevent the economy from becoming a frog in the slowly boiling water of its deteriorating fiscal situation, it may be about time for Japan to institutionalize strictly its reform so that policymakers will sit down at the discussion table by, first of all, tightly tying their own hands with a legal rope in the Anglo-Saxon style.

Fiscal decentralization: We need new clear rules on redistribution

Another important lesson that the Japanese people can learn from the United States is that fiscal decentralization has advantages and disadvantages, particularly on the financial front. The dismal state of affairs in California illustrates that if fiscal sovereignty is delegated to a local government on a grand scale, the local government naturally has to take full responsibility for its own management failures. In Japan, the allocation of national tax revenues to local governments—a system called chiho-kofuzei-seido in Japanese although it is actually NOT a zei-seido (tax system)—has been functioning as a mechanism for redistributing tax revenues from wealthy prefectures to poorer ones. If Japan really pursues decentralization all the way, we would face a situation in which the gap between rich and poor prefectures becomes unbearably wider unless the country creates a new redistribution system to which all regions will agree in lieu of this.

December 28, 2012

January 24, 2013

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