Somewhat unbelievably, Japan lacks an independent organization charged with the responsibility of making long-term budget projections. This by itself may explain why the country has so much trouble getting its deficits under control: Most people simply don’t know how much fiscal trouble the country is headed for.
So, is nobody in Japan doing analysis further than 10 years? A few private sector research institutes and academics have done this. The results are rather grim.
Firing Blind in Tokyo
Hardly anyone is asking what Abenomics will do to the debt. Someone should.
http://online.wsj.com/article/SB10001424127887323394504578607171415697656.html
by Nicholas Benes
When the Japanese cabinet approved its much-awaited growth strategy on June 14, it included a goal of reducing the ratio of public debt to GDP starting in 2021. Economic growth is essential to stabilizing Japan’s spiraling public debt ratio, which the Organization for Economic Cooperation and Development (OECD) estimated to be at 220% in 2012, the highest level ever recorded for any of its member countries. In April, both the OECD and the International Monetary Fund pointed out in separate reports the urgent need for Japan to make “credible” plans to get control of its mounting fiscal deficits.
So with all these cabinet decisions and announcements, you might think that independent, specialist analysts in the government have already produced long-term projections that can serve as the basis for a credible plan. You might think that the decision to approve the plan in June was based on those projections, updated to reflect the expected impact of the new growth strategy and the burgeoning welfare cost burdens that rapid aging will impose on Japan’s shrinking workforce in the decades to come.
Well, if you thought so, you’d be wrong. The economic plan recently approved by the cabinet is actually based on medium-term projections that only extend to 2023. These were produced by the cabinet itself last August under the administration of the Democratic Party of Japan—at a time when the word “Abenomics” did not even exist.
Using the cabinet’s own yardstick to calculate, under a “growth scenario,” the public debt ratio will peak at 189% next year and then decline to 187% in 2023. Under a “conservative” case, it will climb to 221% in 2023. What happens after 2023 is not projected at all.
Somewhat unbelievably, Japan lacks an independent organization charged with the responsibility of making long-term budget projections. This by itself may explain why the country has so much trouble getting its deficits under control: Most people simply don’t know how much fiscal trouble the country is headed for.
In contrast, the European Commission’s Fiscal Sustainability Report projects public debt ratios for each member country to at least 2030, and to 2060 for major components of public welfare costs. In the U.S., the Congressional Budget Office is charged with estimating the fiscal impact of budgets put into law 75 years into the future. And in Britain the 1998 Finance Act requires 30-year “illustrative long-term projections” to be made in a pre-budget report, and the government announces a 50-year Long-Term Public Finance Report each year.
While there may be some controversy concerning their methodology, these independent long-term analyses focus attention on long-term prospects, and provide a starting point for debate over what factors may affect those outcomes. Japan cannot have that debate until it at least has a first round of long-term estimates to argue about.
So, is nobody in Japan doing analysis further than 10 years? A few private sector research institutes and academics have done this. The results are rather grim.
An April 2013 Mitsubishi Research Institute (MRI) report shows the public debt to GDP ratio climbing to 270% in 2030 from 193% in 2015, an increase of about 40%. In a “growth scenario” where GDP grows by an additional 100 trillion yen ($1 trillion) over the next 17 years, the debt ratio would still grow to 223% by 2030, using MRI’s slightly different yardstick
Moreover, this all assumes that 10-year Japanese government bond (JGB) rates stay low until 2025, and only go above 2% between 2025 and 2030. If yields rise much faster, all bets are off. For instance, MRI projects that if JGB rates inch up to 3.4% between 2025 and 2030, the debt ratio will exceed 300%. If 5.4%, it will be about 350%.
Unfortunately, this is not at all unthinkable. Because its aging household sector will continue to deplete savings for the next 15 years and beyond, Japan will become more dependent on foreign investors to buy its government bonds, opening the door to more volatile, and higher, yields than were seen when most bonds were held domestically.
Kazumasa Oguro of Hosei University and Junichiro Takahata of Dokkyo University have also done an independent analysis. They conducted nine simulations showing the impact of various factors on future debt ratios, such as fertility rate and fiscal reform. The conclusions are more comprehensive and convincing than the MRI report, but also more troubling. Their analysis shows public debt ratios in 2050 ranging from 304% at the low end to 995% at the high end, and exceeding 771% in seven of the scenarios.
Of course, these are just simulations. The professors and MRI researchers acknowledge that in the real world, if Japan’s public debt ratio were to increase beyond 300%, there would be significant risk of fiscal and financial crisis. JGB interest rates would increase, leading to drastic budget cuts or depression, or fiscal inflation or some combination of the three, and possibly even default from monetizing too much debt.
There is much more the Japanese government can do to address its high debt ratio. It can issue policies that raise fertility rates, bring in more immigration and increase the consumption tax to a level like 15%. But to take bold actions like these, it needs a clearer understanding of what the future may hold. An effort by the government to formalize its long-term fiscal and economic forecasting would be a good start.