We are seeing a series of improbable developments in Japan, as previously unthinkable changes seem to be swallowed wholesale by an economy which was thought to be on terminal life-support. There now seems to be wide acceptance that it will be possible to make further cuts in corporate tax rates while continuing to beef up sales taxes. Even the IMF agrees that this is the correct strategy, while of course continuing to insist on the need for measures to address the country’s indebtedness: 240 percent of GDP and rising. Due to the fact that a very high proportion of the debt is held by domestic savers, who have historically been prepared to accept low interest rates, the average rate paid by the Government is a mere 1 percent. But the budget deficit this year is likely to be 11 percent of GDP, far above a sustainable level, and debt service mops up nearly a quarter of current government spending. Given that Japanese tax revenue amounts to only 28 percent of GDP (ten points less than in the US and twenty points less than in Europe), the bargain between citizens and Government seems clear: we’ll lend you money as long as you don’t tax us too much. What happens though if savers break ranks, and refuse to continue to support the debt burden at today’s low rates? The answer given by Abenomics seems to be that a dash for growth will pull the country out of its current economic malaise before the worm turns.
A deeper question perhaps is to ask whether Japan can continue to be that immune to global pressures. Low interest rates are a worldwide phenomenon at present, as witness this week’s rate-chopping exercise by Mario Draghi. There is not much temptation for a Japanese saver to betray her Government’s national interest when the alternative is so unattractive. But the era of low interest rates will soon come to an end – it is already remarkable that so much printing of money and quantitative easing has not led to higher inflation, perhaps only because of lack of private demand for money during the debt crisis – and when it does, rates will shoot up. Japan is on a tight-rope, therefore, and you have to hope that Shinzo Abe will be able to get to the other side before the illusion shatters. From that perspective, the IMF, for once, is right, and the overriding need is for the Government to take more money from its citizens, rather than continuing to borrow it. I never thought I would say such a thing, but: “Diseases desperate grown by desperate appliance are relieved.”