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NO. 13 — April 3, 1998

 

Feature Article

JAPAN'S FISCAL DEFICIT AND DEBT: WHAT HAPPENS NEXT? by Arthur J. Alexander

Summary

For all but three of the years from 1970 to 1997, the consolidated budgets of Japan's central and local governments were in deficit. The average deficit over those years was 3.8 percent of gross domestic product. In most years, the persistent deficit was not a problem because the growth rate of the economy exceeded the interest rate on the accumulated debt; that meant the debt did not explode as a share of GDP. Moreover, growth yielded an extra dividend. Government revenues went up about 10 percent faster than the expansion of the economy as a whole, implying that spending could increase without taxes rising as fast.

The net debt of what is called general government, which includes liabilities as well as assets and the surpluses of the social security fund, became negative in FY 1975 and approached 30 percent of GDP in the mid-1980s. However, rapid economic growth for the next several years reversed the trend, but it turned negative again in the 1990s. In FY 1995, Japan's net general government debt was 11 percent of GDP. Excluding social security funds, the net debt in 1997 was almost 60 percent of Japan's total economic output.

The conditions favoring debt stability obviously have reversed in the 1990s. Economic growth is now less than the rising cost of servicing the debt, and the automatic revenue increases have all but disappeared. In addition, an aging population and a slowly expanding work force have required increasing the rate of social security contributions, raising the retirement age and expanding transfers of monies from general government funds to prevent social security reserves from going far into negative territory.

With the imperatives of debt arithmetic and the impending effects of an aging population staring them in the face, Japan's financial authorities decided as early as 1994 that tax increases and spending cuts were necessary for the country's fiscal health. These were implemented in 1997. They had the side effect of bringing the economy's growth to a halt. Without the cushion of the strong economic performance that had simplified the debt-reduction process in the 1980s, the government today faces the hard choice of cutting expenditures to such favored sectors as construction and/or raising taxes while stimulating the economy through greater deregulation and similar nonfiscal means.

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Weekly Review

NEW ECONOMIC STIMULUS PLAN RAISES NEW QUESTIONS by Douglas Ostrom

The fiscal stimulus package that the Liberal Democratic Party announced March 27 potentially is the largest-ever attempt to reflate Japan's economy. Nonetheless, analysts at home and abroad wondered aloud if it would have any significant impact on what a consensus agrees is a very troubled economy. Among the many questions being asked is whether the plan ultimately will contain tax cuts of some sort.

 

PRICEKEEPING OPERATION MISSES TARGET by Jon Choy

On the eve of the much-heralded Big Bang deregulation of Japan's financial markets, a campaign by the ruling Liberal Democratic Party and the Ministry of Finance to boost the prices of domestic stocks by the end of FY 1997 confused investors and brokers about the government's commitment to free-market mechanisms. For months, political leaders and bureaucrats had been wringing their hands over the unhealthy state of banks' balance sheets. Tokyo's so-called pricekeeping operation was aimed partly at helping banks during the crucial end-of-fiscal-year accounting period.

 

ASIAN PACIFIC FINANCE OFFICIALS MEET IN TOKYO, URGE IMF, INDONESIA COOPERATION by Eric Altbach

Senior finance officials and central bank deputies from 14 Asian Pacific economies, meeting in Tokyo March 26 and March 27, called on Indonesia and the International Monetary Fund to reach a quick resolution of the recent standoff over the IMF reform package. The group, which also included representatives from the IMF, the World Bank and the Asian Development Bank, focused its discussions on the economic situations of Thailand, South Korea and Indonesia and, especially, on Indonesia's large private-sector debt. While the participants reaffirmed their support for the IMF's rescue role in Asia, they were unable to generate any concrete proposals in response to the region's continuing economic problems.

 

TOKYO INTRODUCES BILL TO WIDEN PEACEKEEPING SUPPORT ROLE by Barbara Wanner

Consistent with Japan's pledge to the United States to broaden the nation's self-defense roles and responsibilities, the cabinet of Prime Minister Ryutaro Hashimoto introduced legislation March 13 to revise the law governing the Self-Defense Forces' participation in United Nations peacekeeping operations. The amendments will allow SDF field commanders to order defensive fire if a Japanese peacekeeping contingent finds itself in a life-threatening situation.

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