The dogfight over Japan’s biggest problem, its gargantuan government deficit, entered its annual ritual of leaks and pressure tactics that usually lead to a pre-Christmas draft budget with an even bigger deficit. But this time, it’s different. Very different.
Japan has always been a place of huge natural disasters – earthquakes, tsunamis, volcanos, typhoons, to name a few – and the people have long ago come to grips with it, adapted to it, and incorporated it into their spiritual views. When, not if, disaster strikes, they’re shocked and scared like all human beings, but they’re disciplined, stoic in their manner, and there isn’t much looting, at least not by the lower 99% of society.
Perhaps they look at their public budget deficits and the resulting mountain of debt in a similar manner, a giant volcano that can erupt anytime and do phenomenal damage. And they’re no more alarmed about it than they are about the next Big One. But when this disaster hits, it’s going to be entirely man-made. And by democratic means!
So the leaks have started. The Asahi Shimbun, citing an unnamed source, reported that the Ministry of Finance wants to reduce the amount of debt it will issue next fiscal year to below the amount issued this year. Turns out, tax revenues are rising. But pressure is already building up in the ruling coalition to spend even more, now that there is more money coming in.
Japan’s numbers make you dizzy. This fiscal year, ending March 31, Japan is expected to borrow ¥42.9 trillion ($423 billion) to fund its regular budget of ¥92.6 trillion. Regular because a “supplementary budget” of ¥10.3 trillion – a stimulus package, in English – was passed along with it, without which, as Finance Minister Taro Aso explained at the time, “the economy would fall into a severe situation in April-June.”
It brought the first Abenomics budget to ¥102.9 trillion, an all-time record!
The Japanese budget game – like that in the US and other countries – has many kinks to obfuscate reality. So $5.2 trillion of the supplementary budget had to be borrowed, and that additional debt was conveniently accounted for in fiscal 2012, though the bonds would be issued and the money would be spent in fiscal 2013. It sure makes fiscal 2013 look better slightly less horrible.
The ¥102.9 trillion in outlays are being funded in part by issuing ¥48.1 trillion in new debt, including the debt for the stimulus package. Nearly 47% of every yen the government spends is borrowed. This is the great promise of Abenomics. Damn the torpedoes, full speed ahead.
We knew that. But now the source whispered that tax revenues have been rising and will likely hit ¥45 trillion this year, instead of the expected ¥43.1 trillion. This trend would continue into the next fiscal year with tax revenues expected to jump to ¥50 trillion – close to the ¥51 trillion collected in 2007 before the financial crisis.
Where is this moolah supposed to come from?
The consumption tax hike to 8%, from 5%, effective April 1, might bring in ¥4.6 trillion. The government hopes that salaries and annual bonuses will rise, though this may be wishful thinking. And corporate earnings have been soaring as companies translate their foreign earnings into devalued yen. Thus, the government expects revenues from individual and corporate income taxes to rise by ¥2 to ¥3 trillion.
So the MOF has calculated that bond issuance next fiscal year might actually drop below this year’s level, a micro-step in the right direction that would be welcomed by the ratings agencies and might stave off another downgrade – but not disaster.
But no way. With so much free money being pumped out by the Bank of Japan, and with new tax revenues pouring in, lawmakers want to do what they’ve always done: hand out even more goodies to Japan, Inc. and their constituents.
Some of the extra expenditures are based on demographics. The aging population will drive up social security costs, which includes health care and nursing care. The Ministry of Health, Labor, and Welfare, with a budget of over ¥30 trillion, is projecting nearly ¥1 trillion in additional outlays just for that.
The endless desire to spend even more money (that they don’t have) came to light in August, when the various ministries submitted their budget requests. The Ministry of Land, Infrastructure, Transport, and Tourism, for instance, asked for a 16.3% increase to make infrastructure more resilient to disasters. The Ministry of Agriculture, Forestry, and Fisheries asked for an additional 13.6% to enrich the already heavily subsidized ag and fishing interests. These budget requests exceeded ¥100 trillion for second year in a row. Now the MOF is trying to whittle them down somewhat. And the fight is on.
Then there’s the consumption-tax hike. Yup, the big money maker. Companies and households are currently frontloading big-ticket purchases. And these purchases will grind to a halt after the tax hike takes effect; Japan went through this last time it hiked the consumption tax. Frontloading caused the economy to boom for several quarters before the tax hike. The aftermath was a long and steep recession.
Dreading a repeat, members of the ruling coalition are already clamoring for even more stimulus spending to cover that hole next year. Much of it would be dedicated to public works projects, including incomprehensible structures like the unfinished bridges to nowhere that dot the land. Japan Inc. is salivating.
The MOF is trying to dig in its heels. It wants to use the extra revenues to reduce bond issuance by a smidgen. If it prevails, the budget fiasco will get much worse, but at a slower pace.
There is nothing to worry about. The BOJ is printing about ¥84 trillion per fiscal year to buy mostly government bonds with it. Simultaneously, the MOF will sell ¥48 trillion in new bonds. Behind the smokescreen of the “market,” the BOJ will buy them all, plus another ¥36 billion, and rumor has it that it will pick up the pace next year. It is not only monetizing Japan’s deficit, but also big chunks of its outstanding debt.
The Japanese know this. They know that this is just another huge disaster coming their way, the next Big One, so to speak, and they’ll keep going about their lives and doing the things they enjoy doing, or have to do, and they’re not going to panic, because it may be years before this disaster will hit, though the looting at the top has already started.
The beneficiaries of Abenomics are now coming out of the woodwork with soaring profits. But they’re doing the opposite of what Abenomics promised they’d do: they’re diversifying away from Japan. Read…. Here Is Proof (Provided By Japan Inc.) Why Abenomics Fails The Real Economy