The last 12 months were devastatingly costly for Japan.
As Covid-19 fallout shoulder-checked the global economy, Tokyo rolled out a $2.2 trillion rescue package—more than 40% of gross domestic product. More recently, Prime Minister Yoshihide Suga telegraphed another $708 billion of support as deflationary forces return.
Suga’s team capped off the last 12 months circulating a truly scary number: 106,610,000,000,000. That’s the size, in yen terms, of Tokyo’s annual budget for fiscal 2021. Yet the unprecedented 106.61 trillion yen ($1.03 trillion) Suga needs just to fund his government is really a result of bad decisions made over the last 12 years.
The dozen years since the global financial crisis of 2008 are as good a window as any to wonder what might have been. If only the resolving of prime ministers and finance ministers since then had raised Japan’s economic game. If only any of the six governments in power since 2008 had loosened labor markets, cut bureaucracy, catalyzed a startup boom, devised a pro-growth energy policy or empowered women.
Instead, the previous five leaders did exactly what Suga is doing now: throwing ever bigger piles of cash at Japan’s problems.
Not to belabor the bookends metaphor here, but Taro Aso deserves special mention in this context. Aso was prime minister back in 2008 amid the “Lehman shock.” And today, he’s serving as Suga’s low-energy finance minister.
Actually, Aso has been doing this job since 2012. That year, former Prime Minister Shinzo Abe took power pledging a structural reform “Big Bang.” He made Aso, a big power player in faction-driven Tokyo politics, to be both deputy premier and finance minister.
Yet Aso’s team mostly just leaned on the Bank of Japan to boost growth, while Tokyo pumped ever more fiscal stimulus into a deflation-plagued economy. It was the same play Aso’s government ran in 2008. It’s the same one Suga’s three-month-old government is running now, with Aso as his point man.
And it’s not going to work. The $1.03 trillion budget Suga just unveiled is a harbinger of bigger splurges to come. There are many reasons for this. One is that Japan has long since reached what economists call the “diminishing returns” problem. Like a patient taking too many antibiotics, monetary and government stimulus tends to lose potency over time. You need ever bigger jolts to get the intended effect.
Another: the external sector is still sending powerful headwinds Japan’s way. The U.S. is stumbling anew. Europe’s economies continue to ricochet from one debt trauma to another. And the 2% growth many expect from China isn’t nearly enough of a coattail for developing Asia to ride in the months ahead.
Yet the real problem is how Japan’s demographics is working at cross-purposes with the government’s desire to generate faster growth. In recent decades, government after government pledged policies to do a variety of things: generating higher tax revenues via faster growth; increasing the national birthrate; and finding innovative ways to pay for a rapidly-aging population.
Each saw the magnitude of the task and returned to the same-old, same-old strategy of short-term stimulus. In 2018, that approach pushed the Bank of Japan to a troubling milestone: its balance sheet topped the size of the nation’s $5 trillion economy. More recently, Tokyo has been adding to the national debt with ever-growing abandon.
In a recent report, analysts at Fitch Solutions noted how Covid-19 era pump-priming is pushing Japan deeper and deeper into the red. Since the coronavirus arrived, the ruling Liberal Democratic Party has tried three times to jolt the economy via borrowing. Fitch said: “Given that the three extra budgets are entirely financed by debt, with new issuance of Japanese government bonds, we estimate that Japan’s debt to GDP ratio will climb to 282.1%, from 271.7% previously calculated in June.”
A debt load of that magnitude might be fine if 30% of the population financing it wasn’t over 65. It might be OK if the economy in question wasn’t in the midst of a two-decade stagnant-wage nightmare. Or if the political system calling the shots had a new and innovative idea now and again.
The costs of Abe’s newly eight years in power are mounting by the day. No, his government doesn’t get all the blame for the uncompetitive and rigid state of Japan’s economy. But Japan’s longest-serving leader had three big things going for him no predecessor did: majorities in both houses of parliament; a clear economic plan, dubbed Abenomics, the population supported; and plenty of time to get major reforms done.
Abe’s failure to revitalize Japan is evidenced by how quickly the economy folded amid coronavirus fallout. Suga, it’s worth noting, was there all along as Abe’s loyal chief cabinet secretary for seven-plus years. Now, it turns to Suga’s government to end a recession that’s bringing back the deflation with which Tokyo has been grappling for two decades.
There are valid reasons to doubt it’ll work in 2021. Make that 106,610,000,000,000 reasons.