Since the Japanese bubble burst over 20 years ago, Western economists have been pleading with the Japanese government and the Bank of Japan to increase government spending and keep interest rates low. For years they have obliged them. Japan now owes its creditors close to two and a half times its GDP with no end to the deflationary recession in site.
When intervention does not work, interventionists have a handy response always at the ready. The problem is not the intervention, but the fact that it was not implemented on a grand enough scale. This reminds me of what a faith healer said when his efforts failed to heal a child he had placed his hands upon. The problem was not that the faith healer was a charlatan, but that the child’s loved ones did not believe in the power of the Holy Spirit enough.
The usual market touts and the mainstream media are trumpeting the election of new Japanese Prime Minister Shinzo Abe because, “the scale of this budget suggests that Abe’s new administration is serious about stimulating the economy.”
What the article does not tell the reader is that Japan has been spending lots of money for years in an attempt to jump start its moribund economy. The central government’s budget deficit has been below 3% twice in the last 20 years, and interest rates have been close to zero for over a decade and a half; yet, no one considers that perhaps the cure is responsible for the disease.
Rather, the only path seems to involve doing more of the same, which brings us to the latest attempt to return Japan to growth once and for all. The new government proposes an additional ¥12tr ($141bn) in spending. This figure includes window dressing like ¥100bn ($1.2bn) to fund loans for firms to develop new technologies and another ¥70bn ($905mm) in loans to fund Japanese firms’ overseas M & A, but there is more substantial spending in €4tr ($47bn) for public works projects and ¥2.6tr ($30.5bn) to fund pension payments.
Did those last two figures jump at you? They should have. First, Japan has been spending money on bridges to nowhere for years, and its population is shrinking. The last thing it needs to do is borrow $47bn and blow it on projects of questionable utility.
Second, Japan is increasing its budget by $30.5bn to fund pension payments. This is a significant development, because it shows that payments to retirees are running much higher than anticipated just a few months ago. This fact also presages lower income tax revenues as workers become retirees at a faster clip than forecast.
This new budget does not represent hope for an end to Japan’s persistent economic woes. What the Prime Minister’s proposals show is that Japan is now sinking faster than forecast. If 2013 brings a debt crisis, the culprit will not be European.