- FirstPoint Japan Editor
The administration of Shinzo Abe in Japan just approved a rise in the consumption tax (national sales tax) to 8% in April 2014, from 5%. This opens the door for another rise to 10% in 2015. At the same time, the Abe administration plans to spend ¥5 trillion on “stimulus” to offset the negative economic effects of the tax.
I’ve described a typical path of decline as a combination of “stimulus” and “austerity.” The “stimulus” mostly means spending money, or some kind of “easy money” policy. The “austerity” is some kind of tax hike. Put together, they add up to higher taxes, a moribund economy, more demands on the government as the private sector stumbles, more reliance by the government on distributing money as a way of bolstering political support, worsening finances, more waste, and a depreciating currency.
This is completely contrary to the Magic Formula of Low Taxes, Stable Money — the formula that Japan itself used to grow wealthy during the 1950s and 1960s, and indeed in the 1870-1914 period as well.
Most of the focus on “Abe-nomics” has been on the very aggressive monetary expansion being conducted by the Bank of Japan. To some degree this is warranted: the average yen exchange value over the past twenty years is about 120/dollar. However, once that point is reached … what then? I suspect that, soon, it will degenerate into not much more than a way of financing the flood of JGBs that still pours forth.
I think most people understand now that the “stimulus” spending isn’t really about Keynesian notions anymore. Rather, it has devolved into the simple purchasing of political support. Perhaps it was never really more than that, but any other justifications have worn too thin to be credible.
The spending was deemed necessary to preserve political support. When even that didn’t work, they spent more on the military to suppress revolt and revolution. As the private sector economy crumbled under ever-higher taxes, and successive currency devaluations, the king was not so popular anymore. His ministers feared that cutting off payments to nobles and other cronies might erode their base so much that the dynasty could crumble.
How much is ¥5 trillion in “stimulus”? It is more than half the total annual revenue of the corporate income tax, including prefectural and local taxes (about ¥9 trillion), or the projected amount of revenue expected to be generated by the increase in consumption taxes (about ¥6 trillion) — which won’t actually appear in any case.
What if, instead of “stimulating” the economy by throwing money down a hole to appease cronies, you reduced tax rates instead? It might be popular. But, they never think of that.
Nothing good is happening in Japan. Not much is likely to happen, until sometime after the present dingdongs reduce the economy to smoldering ruin.