Don’t fret the debt
Japan’s government is up to its neck in debt. That, however, is not because the government has been overly profligate, but because Japanese companies have been deleveraging for a long time. If Prime Minister Shinzo Abe’s policies revive private investment, the government’s track record suggests it will tighten its belt.
In any economy, if the private sector increases savings, the government must borrow, or the current account surplus must widen. In Japan’s case, deflation has prompted companies to cut back on new investment, while the state has picked up the slack. Between 1998 and 2012, Japan’s corporate sector saved 373 trillion yen ($3.6 trillion, at current exchange rates). Over the same period, the government accumulated a 446 trillion yen deficit. The difference between the two — the extra fiscal support for the economy — has thus been just 73 trillion yen, or 1 percent of annual GDP over 15 years. That hardly smacks of budgetary recklessness.
If Abenomics succeeds in boosting corporate investment, then, the government will have to force itself to live within its means. History suggests both are possible. The quarterly pace of fixed investment by Japanese companies jumped 16 percent between end-2003 and end-2007. Over the same period, the government pruned the deficit with the help of a 28 percent reduction in public works spending.
Can it happen again? Japanese corporate investment in the first quarter was 17 percent lower than five years ago; so there is plenty of scope for a jump. In an ageing society, it will be harder for the government to shrink the 26 percent of GDP that it spends on social welfare and pensions. But it can raise taxes. If Japan had lifted its tax take to 35 percent of GDP – the same level as Britain – from 28 percent in 2010, most of last year’s 37 trillion yen budget deficit would have vanished.
It will take many years of renewed growth and lower borrowing to bring down Tokyo’s giant stock of public debt – 237 percent of GDP last year. Whether or not Abe succeeds depends as much on the response of Japanese companies as it does on the government.