Japan’s new government, led by Prime Minister Shinzo Abe, could be about to shoot itself in the foot. Seeking to boost economic growth, the authorities may soon destroy their one great advantage: the low rate of interest on government debt and private borrowing. If that happens, Japanese conditions will most likely be worse at the end of Abe’s term than they are today.
The interest rate on Japan’s ten-year government bonds is now less than 1% – the lowest in the world, despite a very high level of government debt and annual budget deficits. Indeed, Japan’s debt is now roughly 230% of GDP, higher than that of Greece (175% of GDP) and nearly twice that of Italy (125% of GDP). The annual budget deficit is nearly 10% of GDP, higher than any of the eurozone countries. With nominal GDP stagnating, that deficit is causing the debt/GDP ratio to rise by 10% annually.
Japan’s government is able to pay such a low rate of interest because domestic prices have been falling for more than a decade, while the yen has been strengthening against other major currencies. Domestic deflation means that the real interest rate on Japanese bonds is higher than the nominal rate. The yen’s rising value raises the yield on Japanese bonds relative to the yield on bonds denominated in other currencies.
That may be about to come to an end. Abe has demanded that the Bank of Japan pursue a quantitative-easing strategy that will deliver an inflation rate of 2-3% and weaken the yen. He will soon appoint a new BOJ governor and two deputy governors, who will, one presumes, be committed to this goal.
The financial markets are taking Abe’s strategy seriously. The yen’s value against the US dollar has declined by more than 7% in the last month. With the euro rising relative to the dollar, the yen’s fall relative to the euro has been even greater.
The yen’s weakening will mean higher import costs, and therefore a higher rate of inflation. An aggressive BOJ policy of money creation could cause further weakening of the yen’s exchange rate – and a rise in domestic prices that is more rapid than what Abe wants.
With Japanese prices rising and the yen falling relative to other currencies, investors will be willing to hold Japanese government bonds (JGBs) only if their nominal yield is significantly higher than it has been in the past. A direct effect of the higher interest rate would be to increase the budget deficit and the rate of growth of government debt. With a debt/GDP ratio of 230%, a four-percentage-point rise in borrowing costs would cause the annual deficit to double, to 20% of GDP.
The government might be tempted to rely on rapid inflation to try to reduce the real value of its debt. Fear of that strategy could cause investors to demand even higher real interest rates.
The combination of exploding debt and rising interest rates is a recipe for economic disaster. The BOJ’s widely respected governor, Masaaki Shirakawa, whose term expires in April, summarized the situation in his usual restrained way, saying that “long-term interest rates may spike and have a negative effect on the economy.”
A spike in long-term rates would lower the price of JGBs, destroying household wealth and, in turn, reducing consumer spending. The higher interest rates would also apply to corporate bonds and bank loans, weakening business investment.
Even without the prospect of faster inflation and a declining yen, fundamental conditions in Japan point to higher interest rates. The Japanese government has been able to sell its bonds to domestic buyers because of the high rate of domestic saving. The excess of saving over investment has given Japan a current-account surplus, allowing the country to finance all of the government borrowing domestically, with enough left over to invest in dollar-denominated bonds and other foreign securities. But that is coming to an end.
The household saving rate has collapsed in recent years, falling to less than 2%. The combination of high corporate saving and low business investment has sustained the current-account surplus, allowing Japan to fund its budget deficit domestically. But the surplus has fallen sharply in the past five years, from roughly 6% of GDP in 2007 to only 1% now. With a falling rate of household saving and the prospect of new fiscal deficits, the current account will soon be negative, forcing Japan to sell its debt to foreign buyers.
Abe plans to supplement the easy-money strategy with an increase in government spending of some $120 billion, or 2% of GDP. It is not clear why Abe and his advisers believe that this will deliver sustained real GDP growth of 2% a year. Although the $120 billion is presumably just for the current year (if the spending can be made to happen that quickly), he also spoke during his campaign about a ten-year rise in government spending of ¥200 trillion yen, substantially more than the $120 billion annual rate. The impact of all of this on the national debt and on Japan’s interest rates could be staggering.
Abe is right about one thing: Japan needs to get out of its no-growth and deflationary trap. But the policies that he favors are not the way to do it.
Martin Feldstein
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2 responses to “Martin Feldstein”
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The Wrong Growth Strategy for Japan
by Martin Feldstein
National Bureau of Economic Research http://www.nber.org
Project Syndicate http://www.project-syndicate.org
http://www.nber.org/feldstein/projectsyndicatejan2013.html
Martin Feldstein, a Professor of economics at Harvard, was formerly Chairman of President Ronald Reagan’s Council of Economic Advisors and President of the National Bureau for Economic Research.
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Martin Feldstein のこの文章をとっておいて、安倍晋三の取り巻きの経済学者たちが正しいのか、Martin Feldstein が正しいのか、見てみたい。そう思って、めずらしく全文をポストした。
論理的には Martin Feldstein のほうに分があるが、経済は科学ではないわけで、どうなるかは誰にもわからない。
現時点で予定されている政府の経済財政政策が実際に実行される日はくるのか。日本の経済の進む先は、政府が想定しているように明るいものなのか、それとも暗いものなのか。
正しいも正しくないも、ない。結果。それだけだ。どうなるか。楽しみだ。
せっかくなので私の意見も添えておく。
経済は会社たちが主体をなすものだから、日本政府だけががんばってどうしようもない。しかもグローバルな環境で日本政府が想定していないことが毎日のように起きるわけだから、日本政府の経済財政政策の波及効果なんてしれている。
会社たちは生き延びるためにグローバルなトレンドに合わせていく。もし日本政府の政策がグローバルなトレンドに合っていなければ、それは会社たちの足を引っ張るだけになる。
グローバリゼーションが現実のものとして私たちの周りにあるというのに、グローバリゼーションに賛成とか反対とかいう議論をする人たちがいる。そういう人たちが、どれだけ会社たちの足を引っ張ってきたことか。今交わされている様々な議論も、会社たちを助けるものはなにもない。
空洞化ひとつとっても、空洞化の現実から目をそらし、空洞化は嘘だなどといって安心したり、無駄な議論を重ねたりしている。その間にも、製造業の海外生産比率はどんどん上がり続ける。もう国内だけの経済など成り立たない。それが現実だ。
とすれば、日本政府がなにをしても、無駄ということになる。必要なのは、経済的に関係している国々と同じ方向性を持つ政策。もっといえば、そういう国々と一緒に作る政策というものが望まれるわけで、自分たちだけで作る鎖国的政策がうまくいくなどとは考えないことだ。
結論だけ書けば、今の日本政府の政策はグローバルなトレンドに合っていない。従って、Martin Feldstein の言うようなことのほかに、もう10年以上も言われていること(空洞化など)を加えて、私は日本の経済の先行きに明るい展望を持っていない。たとえ円安が進み、株価が上がり、デフレから脱却できても、悲観的でしかいられない。
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