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COMMENTARY: Japan’s Financial Truant

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TOKYO When asked if he had ever read the classic economics textbook by Paul Samuelson, something almost all first-year students in the subject read, Japanese Minister of Finance and Deputy Prime Minister Naoto Kan replied: “I read about 10 pages.” Of course, no textbook can provide all the answers a finance minister needs in today’s post-crisis world, particularly to meet Japan’s daunting challenges. But many Japanese were dumbfounded to learn that their finance minister began to grapple with the basic principles of economics only after assuming office.

Kan assumed his current office in Prime Minister Yukio Hatoyama’s administration this past January. A civil-rights activist for much of his career, Kan is one of the few members of the Hatoyama government with previous cabinet experience, having served for 10 months in 1996 as Minister of Health and Welfare. An aggressive debater, Kan is often mentioned as a candidate to succeed Hatoyama should he leave his post  a live possibility, given the prime minister’s plummeting approval ratings and strained relationship with Ichiro Ozawa, the kingpin of Hatoyama’s Democratic Party of Japan (DPJ).

Kan became finance minister after his predecessor Hirohisa Fujii suddenly resigned, citing ill health. But Kan stumbled out of the gate by calling, during his first press conference, for a weaker yen a statement that drew an instant rebuke from Hatoyama.  Kan’s international debut was equally inauspicious. At the G-7 meeting in Canada in February, the focus was on the Greek financial crisis and its international implications. Kan jokingly told journalists that he was glad the meeting was not addressing Japan’s public debt, which has now reached almost ¥900 trillion. The meeting, it turns out, was “all Greek” to him.

As a member of the European Union, Greece at least can hope for assistance from other EU members. Japan, however, stands alone with its massive debt. Likewise, whereas Greece’s nominal gross national product is at least growing, Japan remains mired in deflation. And while stock markets are recovering in much of the developed world, Japanese stocks continue to stagnate.

When Kan led the DPJ in opposition, he avoided discussing any raise in the rate of consumption tax. But now that his party is in power and must face the reality of running the second largest economy in the world, and coping with its huge debt burden, he is tossing aside his long-held views, broaching the subject of tax increases to help close the government’s gaping budget deficit.

With Hatoyama continuing to oppose an increase in consumption tax in the next four years, the issue will be a test of the government’s fundamental seriousness. In last year’s general election, the DPJ offered countless rosy promises. New childcare allowances of ¥26,000 per month were to be introduced, at a cost of ¥5.2trillion. The gasoline tax, which brings in ¥2.6 trillion, was to be abolished. And Japan’s greenhouse-gas emissions were to be cut by 25% relative to 1990’s levels.

In attempting to fulfill these inconsistent pledges, government spending this year will reach an all-time high of ¥92.3 trillion. But tax revenue will cover only a fraction of that, as it is estimated at only ¥37trillion for 2010. So, to meet the budget shortfall, a staggering ¥44.3 trillion in government bonds will be issued. Coming at a time when governments with even less debt than Japan need to show that they are putting their financial houses in order, Japan’s budget sends precisely the wrong signal to markets.

Japan’s consumption tax (essentially the same as VAT in Europe) was introduced in 1989 at a rate of 3%, and increased to 5% in 1997, after heated political battles. Japan is no different from other countries in witnessing such disputes over taxes. What is different is that, given the extent of the country’s fiscal problems, the government still continues to think of taxes only in partisan terms.
Voters chose the DPJ in order to change Japan, but they have mostly seen the same old political scandals. Hatoyama has been accused of receiving shady donations  “childcare allowances”  from his heiress mother. Ozawa, the all-powerful Secretary General of DPJ, has been accused of using party funds to buy real estate, and of receiving bribes from construction companies.

Such scandals have tainted Japanese politics for decades. But, just as Kan is planning only to “discuss” raising taxes, the supposedly clean DPJ is planning only to discuss the problem of money in politics by establishing a new non-partisan commission to investigate the problem. Japan, however, cannot afford to waste time building a new apparatus to prevent party-financing scandals. The country has laws on the books to handle the matter. They simply need to be enforced.

What is needed, and badly, is a nonpartisan body to find a sustainable way to pay for the country’s social security programs. Social security expenditures will face a shortfall of ¥6 trillion this year. Given Japan’s aging population, there is a natural increase in the social security budget of ¥1 trillion per year. The country simply cannot keep on piling debt upon debt.

To stop the country’s fiscal rot, Japan must achieve a consensus on the type of social services that national and local governments should offer, for how long, and at what cost. The problem is too grave to be left to partisan bickering. Securing Japan’s fiscal health, as well as the physical health of its people, is the most urgent issue the country has faced in half-a-century.

Yuriko Koike is a former Japanese Minister of Defense and Minister of the Environment. Copyright: Project Syndicate, 2010. www.project-syndicate.org

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