The arithmetic of the ruling class

FOR A NATION such as Japan with a traditionally thrifty population, one wouldn’t expect that debt would remain an intractable problem. Ten years ago, attention was focused on the colossus of non-performing debt held by financial institutions. Now, however, attention has shifted to the gargantuan public debt incurred by the Japanese government.

Funabashi Yoichi

Funabashi Yoichi, the editor-in-chief of the Asahi Shimbun, wrote an op-ed for his newspaper headlined Japan’s Bond Market Has Become Ticking Bomb. It’s a curious piece of work. Mr. Funabashi clearly sees what might cause the explosion, but he might as well be the third blind mouse when he offers a solution.

He starts by dubbing Japan a “debt superpower”:

Over the course of a year, the Japanese government issues 160 trillion yen in government bonds, which works out to 500 billion yen worth of bonds on a daily basis. This is all happening even though Japan has not recently lost a war, nor has it been hit by a natural disaster on the scale of the Great Kanto Earthquake. Japan has become a debt superpower because of years of throwing money at various problems, coupled with the effects of deflation.

He’s evenhanded when it comes to placing the blame. In addition to implicitly criticizing past Liberal Democratic Party governments, he also fingers the current Democratic Party government:

This fiscal year’s budget called for the issuance of 44 trillion yen in government bonds despite projected tax revenues of only 37 trillion yen. The last time the budget had more debt than tax revenues was in fiscal 1946, the year after Japan’s defeat in World War II.

Some have downplayed the severity of Japan’s public debt problem because most of the creditors are Japanese. For example, the largest creditor is:

(T)he Japan Post Bank Co., which holds more than 150 trillion yen ($1.74 trillion) in government bonds…Other major bond holders (include)…Japan Post Insurance Co. with 70 trillion yen.

To these he adds private sector financial institutions and life insurance companies. The result is a structurally unsound edifice:

While this situation could be described as a government bond bubble, there is none of the fervor that is commonly associated with an inflated economic bubble….Funds are flowing to government bonds through a process of elimination that leaves investors with no other advantageous alternative to place their money. The funds now held by Japan Post Bank and Japan Post Insurance have for many years been included in the structural framework for public finance. Life insurance companies and commercial banks are unable to shake off the “convoy mentality” ingrained through financial regulations.

He demonstrates one reason that excessive government involvement in the economy results in distortions which make the cure worse than the disease:

Rather than lend to companies, Japanese banks continue to buy up bonds that have the backing of the government.

The suggestion that domestic ownership of government debt shields Japan from the problems and turmoil in such countries as Greece is also curious. Perhaps it does, but it also creates another problem. Overseas investors can sit on their wallets if they decide the latest tranche of debt is an unwise investment, thus sending a critical signal to the market. Domestic investors, however, don’t have that luxury—particularly Japan Post.

Speaking of Japan Post, Mr. Funabashi names names and provides a sketch of what could go wrong:

The biggest risk factor will probably be Japan Post Bank. This is because 80 percent of the funds it has accumulated have been placed in government bonds. Depositors can withdraw their Japan Post Bank savings at any time. If the bond market should collapse, a huge amount of Japan Post Bank savings would likely be withdrawn. All those institutions are heavily dependent on government bonds. If bond prices should fall, there is the strong possibility…that all those institutions would simultaneously try to sell off their bonds.

Despite having had such a clear view of the road, he unexpectedly veers into a collision course with the nearest tree.

As some Japanese do when advocating a proposal, he starts by citing an overseas authority to provide justification in advance:

Last month, the International Monetary Fund, in its annual report about Japan, “underscored the urgency of credible fiscal adjustment. The key challenge is to bring down public debt to more sustainable levels.”

If credible fiscal adjustment is urgent—and everyone knows that it is—the key challenge is to make the government STOP SPENDING money that doesn’t exist and creating money of the mind that future generations will have to pay for.

We all know what’s coming next:

The IMF recommended that Japan gradually raise its consumption tax rate from the current 5 percent to 15 percent over a 10-year period from the next fiscal year.

In other words, both major parties committed the crime, but the public is going to have to do the time.

He never explicitly states that Japan must take the IMF’s recommendation, but then he uses the phrase, “rebuild its fiscal condition”. In Japan, that’s code for “tax increase”, so everyone knows that’s what he thinks should happen.

Meanwhile, other people might have some recommendations of their own on what the IMF can do with its recommendations.

Until now, the low consumption tax–as compared with rates in other advanced economies–was viewed as a strength that allowed Japanese to shoulder more of a tax burden.

How lucky for Japan.

However, if as a result of the July 11 Upper House election, the ruling Democratic Party of Japan gets cold feet about the consumption tax, the situation will change.

Yes, he’s suggesting that the government should ignore the clearly expressed will of the rabble people and confiscate their money anyway.

As in the EU, some people here seem to think election results can be ignored until the ruling class gets the results it wants.

The markets will be mercilessly checking for discipline in the fiscal 2011 budget and the effectiveness of the government’s growth strategy.

That might be easier said than done. Before they can check on the government’s growth strategy, they have to find it first.

Of course, if the government didn’t create make-work projects for itself, they wouldn’t have to think up ways to vacuum up so much of the people’s money and suck the life out of the economy. They wouldn’t even need a growth strategy. The private sector would handle it for them. (cf. Adam Smith)

Not long ago, some politicians were aggressively dealing with these problems. One reason the Koizumi administration staked its survival on the privatization of Japan Post was to allow the captive purchaser to invest its funds in other instruments instead of buying the bonds that allowed the profligates of government to spend their way into vertigo.

But the current DPJ government—before the 2009 lower house election—allied with a single-issue splinter party to roll back that privatization. The idea was to create a coalition to get bills passed in the upper house until they won an outright majority of their own in the 2010 election. But they were as successful at that as they were in creating a credible growth strategy.

Of course the DPJ also had the support of the postal workers’ union. In a private sector environment, the workers might actually be asked to put in a full day of work.

But which newspaper was it that supported the election of the DPJ in 2009?

It’s no longer the mid-19th century when Japan desperately needed to modernize after more than two centuries of isolation. In those days, the mostly rural or small-town public needed access to such new-fangled things as safe bank accounts and life insurance policies at the government-run post office.

Those conditions don’t obtain any more. In a few years more we won’t even need post offices.

And which party was the one to pass the first budget since 1946 with more debt than tax revenues?

The one Mr. Funabashi’s newspaper supports.

Which party bloated that budget by eliminating income tax deductions for children and moving to a system of direct government cash payments for child allowances? Which party insisted this program was needed to help improve the low birthrate, when it won’t? Which party assured the public that it could easily find the revenue to pay for the program, when everyone knew before the election that they couldn’t?

The one Mr. Funabashi’s newspaper supports.

Which party implemented a legal vote-buying scheme by including subsidies to rice farmers in its historically dreadful budget last year? Which party plans on enlarging that scheme to other farmers and fishermen in the next budget?

The one Mr. Funabashi’s newspaper supports.

Funabashi Yoichi has a BA from the University of Tokyo and a doctor’s degree in law from Keio University. He was a Nieman Fellow at Harvard University and a fellow at the Brookings Institution. He’s won the Suntory Prize for Social Science and the Humanities and a half dozen other awards. He’s written more than 30 books and edited more than a half-dozen others.

Maybe that explains why he can’t put two and two together.

Or why he doesn’t want to.

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