More modest signs of improvement in Japan, with employment and spending improving.

Unfortunately, the Prime Minister seems be about to make the same mistake of past Prime Ministers and take action to reduce the govt’s deficit.

In contrast, China seems to have recognized govt spending spending (and lending by state owned banks that is in fact thinly disguised govt spending) is not operationally dependent on revenue, and that there is no solvency issue nor external constraints on local currency expenditure. China seems to understand the risks are inflation, making adjustments as they see that political threat arise.

See comments below.

Aug Job-To-Applicant Ratio: 0.54% vs 0.54% (expect) / 0.53% (last)

Aug Jobless Rate: 5.1% vs 5.1% (expect) / 5.2% (last)

Aug Household Spending (YoY): 1.7% vs 1.4% (expect) / 1.1% (last)

Sep Tokyo CPI (YoY): -0.6% vs -0.9% (expect) / -1.0% (last)

Sep Tokyo CPI Ex-Fresh Food (YoY): -1.0% vs -1.0% (expect) / -1.1% (last)

Sep Tokyo CPI Ex-Fresh Food & Energy (YoY): -1.3% vs -1.4% (expect) / -1.4% (last)

Aug National CPI (YoY): -0.9% vs -0.9% (expect) / -0.9% (last)

Aug National CPI Ex-Fresh Food (YoY): -1.0% vs -1.0% (expect) / -1.1% (last)

Aug National CPI Ex-Fresh Food & Energy (YoY): -1.5% vs -1.5% (expect) / -1.5% (last)

Japan Prime Minister Says Huge Public Debt Unsustainable

October (Reuters) — Japan’s prime minister warned on Friday that the country’s fiscal situation was unsustainable given its huge public debt, and called for multiparty tax reform talks as he struggles with a fragile economy and a divided parliament.

With perhaps the world’s largest public debt, severe prior downgrades by the ratings agencies, perhaps the strongest currency in the world, mild deflation, and yet ten year JGB’s hovering around 1%, you’d think the historical evidence alone would convince them there is no solvency or funding or ‘sustainability’ issue. But clearly it doesn’t. And while those in monetary operations at the BOJ understand there is no sustainability issue, it is not their place to mention it (much like the US).

Naoto Kan also repeated his resolve to curb a rise in the yen that threatens to derail Japan’s export-led economic recovery, urged the central bank to do more to fight deflation, and expressed hope that opposition parties would join in talks on a extra budget he wants to enact soon.

This seems to indicate he’s pushing for a higher deficit? Or will there be a new tax to ‘pay for it?’ And the only way to weaken the yen vs the dollar is to buy dollars, which is what I call off balance sheet deficit spending. It ‘works’ and there are no operational limits to the amount of fx a CB can buy. But it’s a poor second choice to a domestic tax cut or spending increase.

Japan’s core consumer prices marked their 18th straight month of annual declines in August, as deflation grips an economy struggling with a rising yen, slowing exports and a surprise decline in output. But the jobless rate fell and the availability of jobs improved slightly, data showed on Friday.

Yes, the deficit did go up in the financial crisis slowdown and got large enough to support growth. The question is whether they allow that to continue.

Kan, who took office in June as Japan’s fifth leader in three years, faces a tough time wooing the opposition support that is vital to enact laws since his Democratic Party of Japan (DPJ) and a tiny partner lack a majority in parliament’s upper house.

The government faces the delicate task of reining in debt while keeping the economy going. Japan has built up a huge public debt burden, now nearly twice the size of its $5 trillion economy, during two decades of economic stagnation.

It might help if the media stopped calling it a burden, as it’s clearly not a burden in any sense. particularly with a 0 rate policy (not that it matters for solvency).

“If the current fiscal situation is left alone, it will be unsustainable at some point,” Kan said in a speech at the start of an extra session of parliament.

I doubt he could define ‘unsustainable’ but no one asks as the errant sustainability assumption is pervasive.

He also vowed to achieve Tokyo’s goal of bringing the primary budget balance, which excludes revenue from bond sales and debt-servicing costs, into the black within a decade.

Extra Budget

Kan, whose past calls for debating a hike in the 5 percent sales tax had contributed to a July upper house election defeat, said Japan needs a social welfare system that citizens could trust even if that meants added financial burden on the public.

Multiparty debate on tax reform including the sales tax is thus indispensable, Kan said, reiterating that he would seek a mandate from voters before deciding on the sale tax rise.

The government is crafting an extra budget for the fiscal year to March 31 to stimulate the economy by supporting job seekers and families with children, but has sent mixed signals about the size of the package and how it will fund it.

It does look like they plan on ‘funding it’

Some in the cabinet, such as the economics minister, have said new debt issuance should not be ruled out, but the finance minister is firmly against the idea.

National Strategy Minister Koichiro Gemba has said Japan could fund measures worth around 4.6 trillion yen ($55 billion) by tapping reserves, thereby avoiding new bond issuance.

Functionally this would be the same as deficit spending.

“The biggest task for this parliamentary session is enacting a supplementary budget to finance economic steps. I sincerely hope for constructive debate among ruling and opposition parties,” Kan said in the speech.

Efforts to gain such opposition support will be complicated by a bitter feud with China.

Kan is under fire for appearing to cave in to Beijing’s demands to free a Chinese fishing boat captain detained last month after his trawler collided with Japanese patrol boats near disputed islands in the East China Sea.

The prime minister on Friday reiterated that good ties with China, in the process of replacing Japan as the world’s second-biggest economy, were vital but also expressed concern about Beijing’s military buildup and aggressive maritime activities.

China still has bitter memories of the last war with Japan.

8 Responses

  1. In contrast, China seems to have recognized govt spending spending (and lending by state owned banks that is in fact thinly disguised govt spending) is not operationally dependent on revenue, and that there is no solvency issue nor external constraints on local currency expenditure. China seems to understand the risks are inflation, making adjustments as they see that political threat arise.

    Maybe they’re still listening to Jamie Galbraith (would that our government did likewise).

    Galbraith served as Chief Technical Adviser to the State Planning Commission, P.R. China, on a project on macroeconomic reform from 1994 to 1997.

  2. Translation: Japanese Prime Minister strangles public ability to mobilize and coordinate – great!

    We’re doing this too.

    once you realize that arbitrary limits on public spending = limits on net public ability to mobilize and coordinate – it’s scary

    this boils down to a battle of methodologies:

    a) limit first, then pick over limited options (conservative, deficit hawk GOP approach; no confidence in teammates = Luddites)
    b) accept no limits, also fear to explore options (stuck in no-mans land; deficit dove Democrats lacking courage)
    vs reality:
    c) accept no limits – recognize all responsibility lies in aggressively parsing options
    (operational approach; trust in total team coordination)

    all approaches can work in theory, all have risks, the former two have far more uncertainties, by limiting ourselves as well as our options!

    If we want to cede operational battle spaces to China, we’re doing a good job. All because the trade lobby that has hijacked our currency thinking is intent on protecting personal gains, while not even seeing that their outsized profits come at the expense of national security. Grabbing the biggest piece of a shrinking pie offers no long term security.

    Perversely, our best immediate outcome may be that bankers worldwide convince China to adopt our style of servitude to bank lobbies 1st and public purpose 2nd.

    Even that offers no long term solace. How do we convince people to explore options?

    1. Michael Hudson, America’s China Bashing: A Compendium of Junk Economics

      It is traditional for politicians to blame foreigners for problems that their own policies have caused. And in today’s zero-sum economies, it seems that if America is losing leadership position, other nations must be the beneficiaries. Inasmuch as China has avoided the financial overhead that has painted other economies into a corner, nationalistic U.S. politicians and journalists are blaming it for America’s declining economic power.

      I realize that balance-of-payments accounting and international trade theory are arcane topics, but I promise that by the time you finish this article, you will understand more than 99% of U.S. economists and diplomats striking this self-righteous pose.

    2. not to mention conceding outer space to china as they accelerate their space program and we cut back ours.

      the deficit terrorists are doing hundreds of times more damage to the US than Islamic terrorists could ever possibly do.

  3. Out of all the world’s governments it seems that during the last crisis the Chinese communists had the best understanding of how money works. Who’da thunk it!

    1. Maybe a dozen years ago Jan Kregel set up a meeting for me and Randy Wray with a group of China’s ‘up and coming’ economists and I reviewed everything I knew at the time with them, which is pretty much everything discussed on this website. And they got it. Right down to how state sponsored lending can function to provide what is functionally fiscal support, etc.

      Don’t recall who they were or where they are now.

      1. The Chinese don’t have a lot baggage in the way of gaining understanding about how the monetary system works relative to finance and the economy, and they have no love for neoliberalism anyway. Moreover, they have the Russian experience to alert them about what to avoid in this regard in a transition to market economy.

        They also have a lot of savvy Western folks telling the pitfalls to avoid and how to seize opportunities that the West is missing due to its ideological blinders arising from dedication to self-serving behavior instead of operational reality.

        They are intelligent folks, so it is no surprise that they seem to have a handle on it. Looks like they are in a position to leapfrog the US in many ways, as the US rests on its laurels and commits blunder after blunder, wasting its resources needlessly and even stupidly.

      2. Right, though China would do well to push back against US pressure with a divide and conquer charm strategy. They could point out its not China’s fault that American politicians wish to help Wall Street instead of helping the American people. And that its not fair to the America families who buy imported goods or to the Chinese workers who make them to impose a regulation tax on the free market to distract people from the President’s unpopular healthcare plan and tax increases. America should be cutting taxes in this recession, not raising them (ha ha, I wonder how the GOP would react to the Chicoms adopting their talking points).

        Or the next time they (the Chinese, not the GOP) sucker punch Geithner, they can follow it up with a statement that despite any disagreements they have with Wall Street bankers and the politicians they own, China is and will always be the friend of the America people. If they want to freak out the Japanese at the same time, they could make a point of thanking America for helping China’s own Tea Party (the “Chinese Communist Party” as some people translate it) end Japan’s brutal occupation.

        The US is quick to offer unsolicited advice to other countries, so the Chinese government offering proposals for US political reform would be hilarious, especially if they take up Henry Liu’s shall we say, non-obvious comparison of Mao to Lincoln.

        I believe such a populist Communist approach would rather unnerve Geithner and the President and it’d give China a freer hand if they wish to follow Michael Hudson’s advice to, “use their excess dollars to buy out US investment holdings… at book value”. Besides, its like my grandmother always said, you gather more flies with honey than with Sunburn antiship missiles. :o)

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