In today’s world it often seems that the extremists and populists are the ones with rational economic policies, whereas technocratic centrists remain wedded to ideologically-driven, pie-in-the-sky grand projects.
So the Eurozone’s powers-that-be aim to solve the problems of a premature monetary union by rushing to banking , fiscal and political union. Only right-wing nationalists, communists and neo-pagans dare propose the time-honoured method of regaining lost competitiveness – letting the currency take the strain.
Something similar is about to happen in Japan. Prime Minister Noda has succeeded in passing a bill to double the consumption tax to 10% in two stages over the coming four years. Even this is not enough to satisfy the Keidanren, Japan’s most important business association, which wants to see the rate at 25%.
The result is likely to be politically and economically disastrous. The one saving grace is that both Mr. Noda’s Democratic Party of Japan and the opposition Liberal Democratic Party – with whom he has stitched together a temporary a pro-tax alliance – are haemorrhaging support and may be unable to implement the proposal. For even in the staid world of Japanese politics, populist movements are astir
The DPJ won a landslide victory in 2009 on Obama-esque rhetoric about change. Manifesto policies, such as generous child allowances to help tackle Japan’s demographic shrinkage , have already been blocked or watered down. The tax hike is likely to be the final straw, leading to a party split and an early general election.
The price might be worth paying if higher taxes were to set Japan on a path of sustainable growth and fiscal normalization. The chances of that are slim. The last time the consumption tax was hiked – by 2%, in 1997 – the result was a serious recession and a slump in retail sales from which Japan has never really recovered. Far from plugging the fiscal hole, the hike ended up contributing to a steep decline in central government tax revenues – from 50 trillion yen in 1996 to 36 trillion yen last year.
The reality is that Japan’s Godzilla-sized public debt problem is more Austrian than Keynesian in origin. Japan turned away from stimulus packages in the late 1990s, and public works spending as proportion of GDP dropped from 6% to 3% over the subsequent decade. Monetary policy remained too tight, as testified by the surge in the yen and sub- 1% yields on ten year government bonds. The move to zero interest rates came after deflation was embedded, which meant that even the cash in your wallet accrued a tax-free return of 1-2% each year.
The reward for all this monetary and fiscal virtue was steadily declining nominal GDP , erosion of the tax base and the consequence surge in bond issuance which so alarms Mr. Noda, the rating agencies and international agencies that channel the views of the ministry of finance. The bond market, on the other hand, remains very relaxed.
If the major cause of the debt problem is declining nominal GDP, then it follows that the solution must be rising nominal GDP. Indeed if Japan had managed to grow at 3% in nominal terms over the past 15 years, the economy would be two thirds bigger than it is now, asset prices would be considerably higher and government finances in far better shape.
That is easier said than done in today’s growth-starved world, but at the very least counter-productive moves should be avoided. Too often, Japan’s central bank and fiscal authorities have appeared to be competing to see which would be first to squash any nascent recovery.
To win a conclusive victory against deflation, Japan might need more radical measures . The central bank could go beyond merely increasing its holdings of government bonds and cancel them too. The target for tax hikes could shift from household spending to corporate savings.
Mr. Noda’s DPJ and the opposition LDP are no more likely to sanction such a policy shift than European technocrats are to encourage distressed Eurozone countries to return to national currencies. New priorities require new faces, which is where Japan’s budding populist movement could play a useful role.
The key figure is here Toru Hashimoto, the young mayor of Osaka whose credibility soared after he won a thumping victory last autumn over a candidate backed by both major parties. The philoprogenitive Hashimoto – he has seven children – is in the process of building a nationwide political organization with a view to contesting the next election. He has already come out against the tax hike. Looking at the blunders of his mainstream rivals, he must find it hard to believe his luck.