Japan: The Problem Is Taxes

By Marshall Auerback

When I read Ed’s recent piece “Japan: stimulus without reform leads to a policy cul de sac,” I couldn’t help but think he is wrong about Japan.

Supporting aggregate demand

The problem is taxes. In Japan, taxes are too high relative to the desire for spending and savings. Policy makers need to stop taking so many yen away from working people, so that they are able to buy all of the output which they can produce at full employment levels.

The Japanese should have gone for domestic demand-led growth instead of export-led growth. When export growth reversed, the economy went into depression. Even Richard Koo, who has often spoken of a balance sheet recession and has the right approach on Japan, never imagined that such a thing would happen. But it’s easy enough to resolve; simply support domestic incomes with the right tax cuts to sustain domestic demand at desired levels to sustain output and employment.

One can always sustain domestic demand by altering the fiscal balance. In truth, it is as simple as debiting and crediting accounts on the Bank of Japan’s master yen account spread sheet.

Again, a fiscal adjustment can restore domestic demand immediately.

Savings in Japan

The savings rate in Japan is down as a consequence of falling net exports and what was until recently a falling budget deficit. The deficit trend is now reversing in a very ugly way- falling revenues and increased transfer payments. True, private sector savings have fallen which means that Japanese policy makers have run out room for error. I would contend that the vast scale of private savings allowed them to continue to screw up for so long by, for example:

• hiking the VAT in 1996
• introducing ‘fiscal consolidation’ in 2001 (and finally relenting in 2003 when the economy finally started to grow again, until this latest fiasco).

Issuing one’s own fiat currency debt

But, the notion that the country is in a ‘debt trap dynamic’ as Ambrose Evans-Pritchard suggests is ludicrous. Debt is serviced by data entries by the BOJ- debits and credits to securities accounts and transactions accounts at the BOJ. The BOJ can spend/credit accounts at will. It’s just data entry. Spending is not constrained by revenues (this is fiat currency, not a gold standard). In a worst case, ‘over-spending’ causes inflation. But, that happens to be what they are trying to accomplish. Getting some inflation would be considered a success. Moreover, it can easily be reversed by tightening fiscal policy if it comes to that.

It’s really that simple.

Comments

[hidflect:]

Nonesense. This is more of that Bush philosophy "Cut Taxes!" that never works. The problem in Japan is that domestic demand is locked up by a few distributors. The same supermarket I've been going to here for 13 years has almost exactly the same products on sale. It never varies. There's no choice for consumers at all. Apart from a few flagship products like cars and hand-held electronics it's as bad as the old Soviet Union. My taxes are very low compared to Europe and even the US. But rent eats up 1/3 of my income and the landed wealthy who hold so much property never let the prices deflate to real demand levels. THey rather have 20% of their properties go empty than "lose money" as they see it.

Nov 04 02:13 AM

[Ricard:]

I continually find it amusing that we seem to have more opinions about what the Japanese should do than the Japanese.

Nov 04 02:35 AM

[Mad Hedge F...:]

vgy ) As much as I want to find a trade in Japan and therefore have an excuse to go there again, my searches have recently come up empty. With America maintaining its lead in innovation and the creation of new business models, and China taking over the world’s low end manufacturing, it is hard to see a future for Japan. Can a country of 127 million live only off of the high end manufacturing of luxury cars, video games, and electronics? The country is increasingly looking like a “has been” emerging market. During my career, I watched GDP growth rates fall from a white hot 10% in the sixties, to 4% in the seventies and eighties, to 1% in the nineties and the early 21st century. Are we flat lining at 0% in the teens? That leaves fertile ground only for stock pickers who are willing to do the local spade work to find one hit wonders like Toyota and Fast Retail. That is a job best left to country specialists, like my old friend, 40 year veteran Ed Merner, who runs the Atlantis Japan Growth Fund (LSE-AJG) traded in London, which has shot up a sizzling 80% in six months.

Nov 04 06:22 AM

[chap08:]

Edward, I'm confused, or maybe you're confused. This article seems to be by your colleague, but appears under your name without comment, so I take it to represent your views.

The article appears to advocate monetization of government spending. That is the only way that "Debt is serviced by data entries". If Japan are servicing debts through "debits and credits to securities accounts and transactions accounts at the BOJ" then that is monetization. Otherwise debt has to be serviced by real interest payments to 3rd parties. If you are making interest payments to 3rd parties, then the debt trap risk that Evans Pritchard discussed is very real. It is not "ludicrous".

So, the article advocates monetization of spending. But yesterday, in your article on Japan, you said that you were against QE. I am curious to know how you could be against QE and yet support monetized spending. Although they have different objectives, in some senses, QE is just temporary monetization of spending. Please clear up my, or possibly your, confusion.

Nov 04 07:27 AM

[Edward Harr...:]

Chap, I'm glad you noticed the contrast to my post. This is my colleague Marshall talking, not me! He and I see this issue differently (and Seeking Alpha reproduces most of the posts on my site whether by me, Marshall or guest authors).

Also, AEP is a monetarist I believe and he believes in QE. Marshall sees fiscal policy as more effective and QE as ineffective. I understand you are more in AEP's camp. I think AEP is wrong here on QE because the demand for credit is lacking in Japan and QE just inflates asset prices and produces a carry trade in conjunction with low nominal rates. This is what is happening now in the US as well.


On Nov 04 07:27 AM chap08 wrote:

> Edward, I'm confused, or maybe you're confused. This article seems
> to be by your colleague, but appears under your name without comment,
> so I take it to represent your views.
>
> The article appears to advocate monetization of government spending.
> That is the only way that "Debt is serviced by data entries". If
> Japan are servicing debts through "debits and credits to securities
> accounts and transactions accounts at the BOJ" then that is monetization.
> Otherwise debt has to be serviced by real interest payments to 3rd
> parties. If you are making interest payments to 3rd parties, then
> the debt trap risk that Evans Pritchard discussed is very real. It
> is not "ludicrous".
>
> So, the article advocates monetization of spending. But yesterday,
> in your article on Japan, you said that you were against QE. I am
> curious to know how you could be against QE and yet support monetized
> spending. Although they have different objectives, in some senses,
> QE is just temporary monetization of spending. Please clear up my,
> or possibly your, confusion.

Nov 04 08:02 AM

[chap08:]

Thanks for the explanation Edward.

I can't see that what Marshall is proposing can be described purely as "fiscal". Unless I misunderstand what he is saying, the BOJ would end up owning government debt (or would have written off government obligations), and would have printed money to do so. That is a monetarist, not purely fiscal, policy.

I agree that QE can result in higher asset prices (not necessarily a bubble) and a possible carry trade. Those aren't entirely bad things by the way. Lets recognize that Japanese (and US) asset prices are well below pre-crisis levels. In Japan's case, that means pre 1990 levels. The carry trade is side affect, but doesn't do any lasting damage and, while it's in place, acts to limit deflation and boost exports.

The main reason that I support QE in these circumstances, is that it is the best way of achieving what Milton Friedman showed us to be most important. Last year, if we had let real interest rates rise and the money supply collapse, we would now be on our way to a repeat of the 30s. While some of our Austrian friends think that would have been for the best, I disagree.


On Nov 04 08:02 AM Edward Harrison wrote:

> Chap, I'm glad you noticed the contrast to my post. This is my colleague
> Marshall talking, not me! He and I see this issue differently (and
> Seeking Alpha reproduces most of the posts on my site whether by
> me, Marshall or guest authors).
>
> Also, AEP is a monetarist I believe and he believes in QE. Marshall
> sees fiscal policy as more effective and QE as ineffective. I understand
> you are more in AEP's camp. I think AEP is wrong here on QE because
> the demand for credit is lacking in Japan and QE just inflates asset
> prices and produces a carry trade in conjunction with low nominal
> rates. This is what is happening now in the US as well.

Nov 04 09:23 AM