Japan's No Exit Strategy

Debt and deficits can no longer be brought under control

by Wolf Richter

One of my sources in Japan was told about a yearend Bonenkai party where an official from the Ministry of Finance, the most powerful ministry at the core of Japan Inc., had let slip some things, perhaps after one too many drinks. He confirmed the view propagated by the Liberal Democratic Party, the victor in Sunday’s election, that the Bank of Japan wasn’t doing its job, that it was just giving away money to the banks which then bought Japanese government bonds instead of channeling it into the real economy.

“That’s why the Ministry of Finance is trying to gain control over the Bank of Japan,” he said. “The Ministry of Finance has pride in its ability and is much more qualified to run things than the Bank of Japan.”

Turf war. For him and his ilk, independence of the central bank is a non-sequitur. And elected politicians, when they try to bring the powerful bureaucracy under democratic control, are a nuisance. Prime Minister Yoshihiko Noda and his Democratic Party of Japan had attempted to do that. Now they’re out.

So a new government is being formed by the party that ran the show for fifty years after World War II and is responsible for building the very institutions and structures that got Japan to where it is today. With a new prime minister, Shinzo Abe—who’d already been through the annually revolving prime-ministerial door in 2006/2007. This “new” government is going to fix whatever ails Japan by spending even more money and by wrestling control over the printing press away from the Bank of Japan.

Alas, Japan engaged in “quantitative easing” on a massive scale long before the term had been invented. It has followed the most profligate Keynesian stimulus policies for two decades. Well over half of its current budget is paid for with borrowed money. The country is drowning in liquidity. Interest rates have been at zero or near zero for over a decade. And by the end of this fiscal year, gross national debt will hit 240% of GDP, the highest in the world [for how the MoF plans to deal with that debt, read.... Japanese Ministry of Finance To Bondholders: You’re Screwed!].

But the economy, unlike Greece’s, is not in shambles, though it’s not exactly humming either. Unemployment is 4.2%, the low for the year, and down from the all-time high of 5.6% set in 2009. Youth unemployment, while causing all sorts of hand-wringing, has been improving. One measure: 61% of the high school students to graduate in March (end of school year) have already accepted job offers, up from 58.6% last year. In the US, we don’t even track that.

The overwhelming problem Japan has is of fiscal nature: debt and deficits can no longer be brought under control. Interest rates have to remain at near zero because the state can no longer afford to pay anything beyond that. Public and private pension funds are unable to earn a yield on much of their holdings but must pay out ballooning benefits to ever more retirees while the number of workers who are paying into these funds is shrinking.

Young people have grown up with this scenario, see it every day, know there is no longer a good exit from the debacle. It’s too late. The pile of debt is too big. Promises about job security and retirement are illusory. They work longer hours for less pay than their predecessors, don’t have enough money to move out from home, and consume practically everything they make [ The Pauperization Of Japan].

Their plight has kept Japan competitive—”thanks” to the labor market reforms by Junichiro Koizumi, Prime Minister from 2001 to 2006. More such reforms are on the way. Consumption tax increases have already been passed. If the new government has its way, there will be inflation—final straw for the young, whose wages won’t keep up with it. These are some of the consequences of a deficit-funded joyride by Japan Inc., the current generation of retirees and near-retirees, and other interest groups.

But they’re leaving their mark on young people in unexpected ways. Gender inequality, for example. A legendary issue in Japan. In 1992, when the government first surveyed its citizens on it, 60% agreed with the statement: “Husbands should work outside, while wives stay at home.” The survey was repeated sporadically; each time, the percentage dropped. By 2009, only 41.3% agreed with it—modern times after all. The next survey results were released today: those who thought wives should stay at home jumped 10.3 percentage points to 51.6%. The highest since 1997. A surprising reversal.

Surprising because of its origin. It wasn’t the older generation, but the young: 55.7% of the men in their 20s thought so, up from 34.3%; and a flabbergasting 43.7% of the women in their 20s agreed with it, up from 27.8%. These are not rounding errors or statistical aberrations but enormous shifts in attitudes.

“I suspect young people today are deeply concerned about their future,” explained Prof. Kakuko Miyata of Meiji Gakuin University, an expert on social psychology. She fingered the economic malaise young people are stuck in and added that “they may wish for the home to be a source of emotional support.” Well, instead of starting businesses to getting things going.