What goes around

Bullets are flying from all directions. Recently they’ve been coming from behind, from my allies.
- Prime Minister Noda Yoshihiko

THE Japanese prime minister announces that he wants Japan to participate in the Trans-Pacific Partnership free trade agreement to “open the country”. A large group in his party immediately declares their opposition. The prime minister also insists on a consumption tax increase as part of a “fiscal reform” program to tie consumption tax receipts to social welfare expenses. A larger segment of his party declares their opposition, remembering how the mere mention of discussing a consumption tax increase turned a potential upper house election victory to defeat in 2010. The legit opposition parties refuse to discuss the bills for the upcoming fiscal year budget if they are premised on a consumption tax increase. The poll numbers for the unpopular prime minister are dropping, and the opposition sees a chance to force an election.

The prime minister has half a mind to do just that, and hints he’ll dissolve the Diet. He knows an election will inflict one of the largest electoral slaughters in Japanese history on his party, but a commanding officer has to ignore his emotions to send his troops into battle. His strategy is based on the belief that the Liberal Democratic Party, the primary opposition, won’t win enough seats to form a government without his party’s help. Even if his party loses and he is ousted as prime minister, he will die a happy man because history will remember him as the man who did what had to be done.

No, that’s not a rehash of the news from the past two weeks, but the summary of the lead article that appeared in the 10 February 2011 edition of the weekly Shukan Bunshun. The prime minister was not Noda Yoshihiko, but Kan Naoto.

Yet today circumstances are much the same; only the date is different. Last year, New Komeito head Yamaguchi Natsuo’s opposition to budget negotiations was the factor pushing Mr. Kan into thoughts of an election. He had hoped to convert New Komeito into an ally, if not coalition partner. Mr. Yamaguchi is said to be sympathetic to the DPJ, but the women’s group in the party, a critical element of their election campaigns, actively disliked Kan Naoto.

Prime Minister Kan was also obsessed with his place in history. (He wanted a large bust of himself placed in the prime ministerial pantheon, but all anyone has to do to see one of the largest busts in Japanese history is to look at his photograph. Funny how it works out that way.) Mr. Noda, in contrast, does not seem to share that obsession. Other than that, everyone’s back where they were last winter, just before the Tohoku earthquake.

If our political leaders were accountable the way business leaders are for keeping the books straight, they would all be in jail.
- Phillip K. Howard

When last we saw Noda Yoshihiko, he was promoting Japanese participation in the TPP talks and the doubling — at a minimum — of the consumption tax rate. A large group in his party immediately declared their opposition to both ideas, many of them reprising last winter’s discontent. Former party president and secretary-general Ozawa Ichiro is the most closely watched of those opponents. Though Mr. Ozawa has lost some of his political heft, shown by his failure to unseat Kan Naoto in a party election and in a no-confidence motion in the lower house, he retains the loyalty of many party members.

Late last month, Mr. Ozawa said he opposed the tax increase. The party, he maintained, should first emphasize the reduction of unnecessary expenses and government reform.

Former Chief Cabinet Secretary Sengoku Yoshito, and now one of the party leaders, said, Bah, Humbug! on national TV:

No matter how many reforms we carry out now, we’d still get only about two or three trillion yen.

That’s one of the leaders of a party that two years ago claimed during their successful election campaign they could conjure up JPY 16.8 trillion through reform and budget revisions alone. Mr. Sengoku used on Mr. Ozawa the charge that others used on the DPJ: all that hooey was just political pie in the sky fed to the voters:

It’s (his) experience that simplification and sloganeering wins elections.

During the same broadcast, he also suggested the country would fall apart in five years unless the consumption tax was raised to 15%. Such are the threats of those for whom a reduction in the size of government would be a denial of their life’s work.

For now, the Noda government chose the moderate, prudent, let’s-not-scare-anybody approach by adopting a plan to increase the consumption tax to 10% in 2014, while promising to attach a clause to the tax bills stating that the government is preparing for “the next reform”. Translation: We’re planning to raise the tax still further to 15% or 20%. For some reason, the media falls for the Newspeak that higher taxes = “reforms”.

They’re not likely to stop there, either. Takenaka Heizo, former Prime Minister Koizumi’s privatization guru and man of many Cabinet portfolios, thinks they’ll have to up the bidding to 25% or higher.

And not a bit of this will do any good. From university professor/author/blogger Ikeda Nobuo:

The government has finally settled on a draft of legislation to combine the tax systems and social security, and increase the consumption tax to 10% by October 2015. There was strong opposition within the party, and the plan was finally approved after a lot of slapstick, including a kerfuffle about members bolting the party. Can this result in the reconstruction of the nation’s finances?

The answer is no. The reform to unify taxes and social security is expected to increase income by 13.5 trillion yen, while simultaneously increasing social security expenditures by 15 trillion yen. Thus the budget deficit will only increase. Taking so much trouble to create this reform that isn’t a reform means it is just a matter of time before the financial debacle occurs.

Speaking of slapstick, the Finance Ministry floated a plan on the 26th last month to return a portion of the consumption tax increase on food to those who make JPY 5.5 million or less a year. They project a revenue increase of JPY 13.5 trillion from the tax increase, less JPY one trillion for the refunds.

Now for the punch lines: The ministry made no distinctions for a person’s marital status or number of children, which means 60% of the nation’s households qualify for rebates. After realizing they resembled the kid in the joke who smacks the ice cream cone into his forehead, they announced they were rethinking the problem to lower the income level of those eligible and insert family size into the equation.

They still refused to consider exemptions in the tax increase for food items of the type applied in other countries. Nope, that just won’t do. The people have to understand they’re entitled to receiving payments of other people’s money from the government. How else can they make the country safe for social democracy?

Government spending does not ‘spur growth’. If it did, Japan would have been the world’s growth engine for the past two decades.
- Peter Tenebrarum

Mr. Noda’s Cabinet has also finalized a budget for 2012 that increases the national debt, though it supposedly reduced outlays by JPY two trillion from the previous year. This was achieved by the magical political technique of book cooking and the idea that saying it makes it so. For the third straight year, the government will issue more debt than it will recoup in tax revenues. The upcoming year’s spending for rebuilding the Tohoku region (JPY 3.7 trillion) is tucked away in a different account over there somewhere. In other words, they’re saying it doesn’t really count because they put it in a different pile.

The government will also make another pretend pile and offset half of next year’s pension benefit expenditures by issuing JPY 2.6 trillion in so-called special bonds that aren’t going to be counted as expenditures. They’re going to wait until the consumption tax increase brings in more money before they start pretending to count it. This invisible shell game to bring in a budget lower than the previous year will fool those who limit their intake of information on current events to reading the Headline News. Kiuchi Takahide, chief economist at Nomura Securities, can see the pea under the shell:

The government is trying to maintain surface appearances by playing with the numbers…This budget clearly shows Japan’s fiscal situation is worsening.

More comical than the attempt to hide fiscal baldness with a comb-over was this comment from The Japan Times:

This wasn’t how it was supposed to be. Prime Minister Yoshihiko Noda, a fiscal hawk and former finance minister, said earlier this month that it was imperative to get the country’s public finances back on track.

That’s some more of what Prof. Ikeda termed slapstick. Most Japanese “finance ministers” know nothing about financial affairs; their job is to be the media spokesmen for the Finance Ministry. In addition to Mr. Noda in the DPJ governments, that includes ex-political agitator Kan Naoto and ex-newscaster Azumi Jun.

Whenever any media source uncritcally parrots the the ministry line that these people are “fiscal hawks”, it is a signal for the reader to find new information sources.

That phrase was never part of the public discourse until it became necessary to convince the gullible that a left-of-center party really and Honest to God truly was serious about reducing government expenditures. The truly serious, however, did the math. The average annual government expenditures from 2001 to 2008 under the Koizumi, Abe, and Fukuda (LDP) administrations were JPY 83.6 trillion. The budget deficits fell. So did the bond issues, for all but the Fukuda administration. The similar figures from 2010 to 2012 for the Hatoyama, Kan, and Noda (DPJ) administrations was/will be JPY 94.3 trillion. The budget deficits rose. So did the bond issues.

(That omits the outlier, Aso Taro (LDP) for the FY 2009 budget, whose government boosted government outlays in the name of stimulus when the United States and other countries were doing the same.)

This tax and social security “reform” misses the point, as securities analyst Kondo Shunsuke points out:

The government plan positions the social security system as “the shared asset of the people”. They say that a consumption tax increase will be necessary to offset the continuing rise in expenditures. They say they have hammered out a policy to secure a stable revenue source for the social security system and achieve fiscal soundness at the same time. The plan also responds to changes in society, such as the globalization of the economy and the widening income gaps.

The view that the social security system is “the shared asset of society” is only one aspect of the thing. The problem with the social security system begins with the aspect that it is a liability of the state. This perspective is essential. As long as the public is brainwashed that the problem of the social security system is a problem of “the shared asset of society”, the problem that it is a liability of the state will continue to be hidden, and there should be no hope a real discussion will be conducted for the benefit of the nation and the people.

The sooner we recognize the 20th century entitlement state is over, the sooner we can ring in something new. The longer we delay ringing out the old, the worse it will be.
- Mark Steyn

In addition to the consumption tax, which is inherently flat and therefore considered “regressive” in some quarters, the DPJ plans on doing what governments of it type always do. They will take proportionally more money from the people who have proportionally more of it. Starting next fiscal year, they will reduce income tax deductions for those making more than JPY 15 million in salary, raising the income tax on those making JPY 50 million from 40% to 45%, and boosting the maximum inheritance tax rate from 50% to 55%. How effective that last measure will be after they get done cutting the gift tax to children and grandchildren — another DPJ plan — is not apparent.

Yet another bright idea is raising the tax on the new ersatz beers to the same level as regular beer. This will be successful — in killing off the market, because the only reason those beers were created was to beat the higher tax rates on real beer.

What can be said about a government that thinks the solution to the governmental failure to fulfill its fiduciary responsibilities is to confiscate 45% of anyone’s income, 55% (or even 50%) of anyone’s assets on death, and eliminating profitable business sectors? Here’s one thing that can be said: Those are not ideas from a government interested in the well-being of its citizens or the economic growth of the nation as a whole.

The real opposition?

Some people realize there are better ways to address the problem. As usual in the post-Koizumi era, the ideas are coming from sub-national governments, where voters have better luck installing politicians willing to walk the walk. Osaka Mayor Hashimoto Toru, elected at the end of November, is showing signs that he might be a real fiscal raptor rather than a media throwaway line. He’s already announced that he will scrutinize municipal subsidies with the intent of eliminating as many of them as he can. These outlays total JPY 32.124 billion, and it’s not entirely clear yet who gets what. What is known is that JPY 110 million goes to the Osaka Philharmonic Association, which operates the local symphony, and JPY 139 million is handed out to the group that operates the Kids Plaza Osaka museum, which seems to be a glorified playground. Says Mr. Hashimoto:

I don’t understand the meaning of a lot of these subsidies.

Oh, it’s not that hard to understand. What politicians can resist playing Sugar Daddy Warbucks, or the temptation to spend public funds as a way to justify their jobs?

Japan’s second- and third-largest cities (Osaka and Nagoya) are now being run by mayors with an approach diametrically opposite to that of the national parties. They claim to be interested in reducing the size of government. (Nagoya’s Mayor Kawamura Takashi just announced plans to introduce a bill to cut municipal taxes by 10%.) Both trounced their opponents last year, indicating where popular sentiment lies.

A few at the national level are finally seeing the light. Ten DPJ Diet members recently quit the party, and nine of them cited the Noda government’s tax increases as their reason. They’ve formed a new party called Kizuna. The name means “ties”, as in ties of friendship or blood, and it became the buzzword for 2010 in the aftermath of the Tohoku disaster. (Some politicians criticized the name selection as a cheap ploy, but what would politics be without cheap ploys?)

Their slogan is “autonomy and self-reliance”, a capital idea if they’re interested in seeing it through to the end. In addition to opposing the tax increases, they’re also part of the anti-TPP crowd.

How interested they are in real autonomy and self-reliance remains to be seen. Some view them merely as a receptacle for Ozawa-Hatoyama allies. They’re also positioning themselves to stay viable for a lower house election widely expected this year.

Snap goes the Diet

Prime Minister Noda said that if his tax increase and budget-related bills don’t pass the Diet, he will dissolve the lower house and call for an election.

He has therefore guaranteed that the bills won’t pass the Diet, forcing his hand on an election. It might be difficult to get them through the lower house, where the Ozawa-Hatoyama allies could try to derail the train, but it will be even more difficult to get them through the opposition-controlled upper house.

Thus, into the Valley of Death marches the DPJ. The current issue of the weekly Shukan Post features a simulation of the election results. The authors are the first to admit their projections could vary widely depending on a number of factors, but every projection assumes there will be bucketfuls of DPJ blood in the water. As a mid-line forecast, the Shukan Post calls for the DPJ strength to plummet from its current total of 301 seats to roughly 160. In contrast, the magazine looks for the LDP to climb from 118 to 195 and their New Komeito allies to move from 21 to 31. That will not be enough to form a government on their own, however. Recall that last year, Kan Naoto planned on both a DPJ defeat and an opposition whose lack of seats required DPJ cooperation to rule. Then again, this time last year Mr. Kan was unconcerned about Mr. Ozawa starting a new party. A report this weekend says he’ll do just that by March or April and take 70 people with him.

Another factor has changed since then. The magazine also projects the seats for the reform Your Party to climb from five to 38. They also expect the local parties of Osaka Mayor Hashimoto and Nagoya Mayor Kawamura Takashi to run candidates, and think the former might win as many as 18 seats and the latter as many as 12. That would an aggregate of 68 seats for the three reformers, which could enable them to exert real influence on the direction of national affairs.

That would suit the public just fine. Public opinion polls show that from 60% to 70% of the voters prefer a complete political realignment rather than a government centered either on the DPJ or the LDP. In many ways, the Japanese public has been years ahead of their counterparts in the West in consistently choosing to cast their votes for real change.

Meanwhile, Mr. Noda chose to demonstrate his determination by quoting Winston Churchill in English in his first speech of the New Year. He said he would “never, never, never give up”. (There might have been more nevers, but I lost count.)

That would usually be an admirable approach for a political leader guiding his nation in difficult circumstances, albeit self-imposed, but one wonders just whom Mr. Noda thought he would impress with a backbone fashioned from hot air. He wants to rally the nation by demonstrating his resolve to gun the engine of government and drive the nation off the cliff?

For years, people both in Japan and the West have criticized Japan’s politicians as being inferior to those paragons of wisdom and practicality in the United States and Europe. I most strongly disagree, however. I maintain that Japanese politicians are truly world-class.

They are just as myopic, stupid, and absorbed by self–interest as any group of the bunkum peddlers anywhere.

Consider: It’s been 11 months since the political situation was as described in the first paragraph. After all the sound, fury, earth quaking, big wave crashing, and the subsequent aftermath, they’re finally back where they were in February 2011.

Afterwords:

The tenth DPJ refugee said he left the party for personal reasons, but he wound up in a new vanity party of ex-LDP mini-baron and jailbird Suzuki Muneo with a few other DPJ bolters close to Ozawa. That allowed them to reach the minimum number of members for political parties to receive public funds for their operations.

*****
Will Mr. Noda and his government be successful in getting what they want? Maybe not at all.