Fiscal policy in the eyes of the Japanese public

It increasingly seems that if Abe Shinzō is going to remain in office, he will need to retain the approval of the Japanese public, and that if he is going to retain the approval of the Japanese public, the Japanese public will need to reap some of the benefits from the purported revival of economic activity. But beyond the basic question of whether or not Japan is growing and whether the benefits of growth there are larger questions about the future of Japanese capitalism. Will Japanese companies focus more on shareholder value and profit maximization instead of protecting jobs, preserving relationships with contractors, and prioritizing bank financing over equity financing? Will individuals embrace unconventional career paths, less on-the-job training, more mid-career job changes, more control over pensions and personal investments, with the risks that all of these changes entail? Does the Japanese public believe that the pillars of Japanese capitalism should change?

Of course, opinion polls can only reveal so much and suffer from flaws that undermine their validity — and public officials are free to ignore the preferences of the Japanese public in pursuit of their goals. But polls can provide hints as to how the Japanese public will respond to government policies or market developments.

In a series of posts over the coming days, I will review public opinion polls dating as far back as 1993 to assess Japanese attitudes to government spending, deficits, and fiscal retrenchment; structural reform; the social security system; and saving, investment, and the financial sector.

Fiscal stimulus, fiscal retrenchment, and the state: If there is one fundamental fact concerning Japanese public opinion about economic policy during the "lost decades," it's that, while recognizing the need for fiscal stimulus the Japanese people are ambivalent when it comes to how the government should pay for it. For example, in September 1993, early in the first lost decade, 80% of respondents in an Asahi poll said they wanted the government to cut income taxes as soon as possible, with only 11% in disagreement. However, when asked whether the government should issue deficit bonds to pay for tax cuts, only 23% agreed, with 55% opposed.

The same ambivalence has appeared repeatedly over the past twenty years.

• In March 2000, an Asahi poll asked whether issuing new bonds to pay for economic stimulus was “unavoidable” or whether the time was coming to reduce borrowing and fix the country’s finances: only 17% of respondents supported the former proposition, while 77% supported the latter.





• The percentages were roughly the same in response to that question in December 2000 and February 2001 — despite a July poll finding that 47% felt the Mori government should focus first on economic stimulus, compared to only 18% who felt it should put fiscal reconstruction first. 
• The public was often dubious about structural reform under the Koizumi government (more on this in a bit), but was overwhelmingly supportive of structural reform when it came in the form of public spending cuts or restructuring (or privatizing) public corporations. For example, the public favored a 10% cut in public works spending in the 2002 budget, with 52% in support and only 37% opposed. When asked in December 2002 whether the government should build more roads, 64% opposed the notion with only 24% in favor. The public also went from neatly divided on postal reform to decidedly in favor of the reform that was Koizumi’s pet project.
• As the Aso government coped with the global financial crisis in 2008-2009, the public signalled that it favored focusing on economic growth instead of fiscal reconstruction. However, as before, the public was overwhelmingly opposed to financing stimulus through deficit bonds. An October 2008 Asahi poll found only 24% of respondents in favor of paying for stimulus with deficit bonds, compared to 56% opposed.
• The DPJ encountered the same ambivalence. The public once again wanted the government to focus on stimulus, but when asked in January 2010 whether they approved of the Hatoyama government's having to undertake the largest deficit bond issuance to date to cover its budget, 69% of respondents were largely or completely opposed, with only 1% giving their full approval and 35% giving partial approval.
• While commentators usually attribute the persistent campaign for a consumption tax increase to the ministry of finance, the public has at various times signalled its willingness to support a higher tax rate, perhaps because of long-term uneasiness about the state of the government's finances. The Japanese public may be open to the idea, but whether it supports a particular plan depends entirely on the details (the timing, the size of the increase, the state of the economy, how new revenue will be used, etc.). There is, of course, a lesson for the Abe government as it decides whether to proceed with the plan to raise the consumption tax to 8% next April and 10% in October 2015.





• The Japanese people remain ambivalent about government finances. In August 2012, Asahi found that 62% of respondents felt that Japan's fiscal situation is very serious, with another 32% who said it is somewhat serious. At the same time, however, 90% of respondents said that growth and jobs would be very important (53%) or somewhat important (37%) for deciding how to vote in the next general election, making it the most important issue for voters.
• Abe has not been exempt from the public's ambivalence. A poll in January found 49% approval for fiscal stimulus based on public works projects, but when asked whether they thought it was good that stimulus spending would be funded by deficit bonds, only 22% agreed while 65% did not.

As the above data suggest, the Japanese people have indicated that they want the Japanese government to focus on economic growth and jobs, but they have consistently opposed the use of deficit spending to pay for economic stimulus. The Japanese public is not, however, opposed to the state's providing social security, economic stimulus, or support for business using public funds. Public support for the former policies is consistently strong, and regarding the last point, during Abe's first government, Asahi found 49% support for Abe's emphasis on support for businesses as part of his growth policies, with only 33% opposed. In theory, the public may also be willing to support higher taxes. A March 2010 Asahi poll asked respondents about the kind of society they wanted Japan to be. Most preferred a high tax, high welfare society: only 10% were absolutely in favor, but 55% opted for "if I had to say, high tax, high welfare." Only 23% said "if I had to say, low tax, low welfare" and only 6% were absolutely in favor of low taxes and low welfare. Similarly, when asked whether it was better to strengthen or weaken progressive taxation, 38% said it should be strengthened, with another 45% opting for "if I had to say, strengthen it." Only 13% said it should be weakened.

Given that Japan's central government has consistently been at or near the bottom of the G7 countries in terms of tax revenues, there's certainly room for the government to collect more, but as with the consumption tax, whether the public will support higher taxes depends entirely on the details: which taxes are being raised, how much they're being raised by, and, most importantly, how the new revenue will be used. Perhaps the public's opposition to public works for most of the 2000s and its longstanding opposition to deficit bonds ultimately stem from skepticism about what the government promises to do resulting from seeing government after government fail to end Japan's economic stagnation. In that sense, the public's enthusiasm for Abenomics looks that much more remarkable.

The next post will shift from thinking about how the Japanese public wants the government to tax and spend to thinking about what the public wants the Japanese private sector to look like, how they think companies should act, and what they think of structural reforms to change the face of Japanese capitalism. 

A reply to Jun Okumura from Naomi Fink

Jun Okumura raised some questions regarding the op-ed in the Wall Street Journal Asia that I co-wrote with Naomi Fink. Naomi has penned the following reply to Jun.

I contest the points on fiscal policy as follows:

If you do not count the Y6trn stimulus portion of the FY09 budget (which Jun Okumura has not) then you do get 4% rather than 5. It certainly is not trivial, but I guess the argument is whether this amount should have been included or not - I went by the Nikkei's breakdown of stimulus, which included the 6trn yen. I am certainly receptive to arguments about the increases in general budget spending as necessary anyway, etc. But I am not sure whether this is the argument that Jun is making. But in my mind, I favour counting it - not because I wish to make the LDP look generous in its largesse, but simply because it is an increase in spending that maybe ought to be assessed as "stimulus" in order to measure its growth multiplier. So if we measure the rise in domestic consumption growth of 0.8% versus the stimulus package (yes I realise I am comparing an annualised quarterly growth figure versus expenditures whose components might or might not be disbursed evenly throughout the year), the rise does not look particularly impressive, considering that consumption is over 58% of GDP as of Q2. And yes, since it is part of the general budget, we assume it will be gone by next FY.

2. The fiscal lending and special account is indeed part of the "buried treasures" that the DPJ hopes to tap. But not all of it diminishes as a result of stimulus - for instance, part of this comes from the FX special account, which comprises revenue on Japan's foreign reserves, which have according to the MOF roughly about Y4trn per annum, half of which has already been tapped to pay exernal liabilities. JBIC has also been given the right to use these for overseas dollar lending. This is probably a much more productive use of foreign reserves than rolling them over into ever lower-yielding US Treasuries. Of course, the question of reducing the balance of reserves (funded purely by issuing short-term debt) is another matter, and liquidation of these reserves might be a more practical solution of Japanese short-term interest rates rise). So in this sense, this source of revenue is unsustainable, yet its very unsustainability is tied to reflation.

3. Yes, much of the stimulus does consist of "borrowed money", and this is why I think he might be missing my point about the primary balance as an important measure of fiscal discipline. Primary balance excludes bond revenues, as well as interest payment and debt redemption. Thus, if tax receipts do not rise in tandem with debt issuance, then you will see a decline in the primary balance... expenditures minus (primarily) government tax revenues. Which means that the debt issued has had an insufficient multiplier. My point is not that the DPJ will be able to govern debt-free, but that it has the opportunity to reduce debt issuance if it wants to. The primary balance is in supposed to be a target, and the DPJ can set it realistically - if it targets an average reduction of the deficit certain amount - say 10% over the first two years (just a hypothetical figure) then it must either spend less and reduce debt issuance or raise tax revenue in order to achieve that goal.

That is again why I favour privatisation and reduction of the government's balance sheet - another source of revenue from other sources than issuance of debt. The whole point is to ensure that expenditures are productive, which if not a measure of fiscal austerity is certainly a measure of fiscal responsibility. This is why it is not an unimportant short-term point that the DPJ might abandon just in order to win an election - if spending proves unproductive, it will probably (barring a massive global economic boom that will bring exports back beyond year-ago levels) lose elections in the future.

4. The point on timing of expenses is a very good one, and admittedly, I have never studied the capacity for back-dated receipts to draw a disproportionate amount from the fiscal pool in a particular quarter. I agree however that the most that the DPJ will be able to do with current stimulus is fine-tune rather than completely redirect, assuming that "cutting waste" will not be immediately possible. So: suspend disbursements of future expenses? Hardly, that is why I made a point point about metrics for productivity as conditions for future disbursements, and widening the corporate tax base. You use the same amount of money for more productive means, and thereby achieve a better multiplier. The problem in Japan is that there appears a belief that all forms of fiscal stimulus are created equal. As we might see by the decline in potential growth from above 4% (OECD estimates) before the bursting of the bubble to 1%, possibly to dip further, unproductive spending damages future growth. Also, see my point below on tighter enforcement of current guidelines - making sure expenses are legitimate is one way to ensure tax exemptions and subsidies actually correspond to consumption or investment (and thus growth) rather than to hoarding of cash.

5. On the consumption tax rise, David Ricardo did argue that consumers would build in an expectation to pay more tax in the future when deficits balloon. However, he admitted that consumers are subject to a "fiscal illusion" that prevents fiscal deficits from translating to immediate expectations of reduced purchasing power. So arguably, consumers are not reducing consumption and saving more because they know that they will have to pay more taxes in the future. They are saving because neither employment or investment income is growing, which is very much a private sector concern (I have charts from the Cabinet office sentiment survey that show the parallel moves in personal income and confidence). In fact (as was the case before Germany's tax hike), when the economy is already growing, then consumption should increase in response to the announcement of a tax hike. Conversely, if consumption is not growing, the government will garner diminishing returns from the tax hike (as experienced under Hashimoto in 1997).

6. Widening the corporate tax base: Certainly, the DPJ's commitment to put its foot down on tax incentives is a good idea - but again, this will take time. In the meantime, what about more strictly enforcing current guidelines such that they crack down on existing evasion? This would be a start in the first year, before they legislate. This would be one course of immediate action - in order not to crush existing consumption, focus on the big tax evaders rather than trying to bring down the largest number of tax evader). Since even Switzerland is cracking down on tax evasion, this might be a good time to join the crew. If some small businesses were put under the same scrutiny employed by the American IRS on small business, they would probably find another type of "buried treasure".

The whole point is indeed to get all businesses to pay more corporate taxes than they do now, and raising tax revenues. But again, you do this by ensuring more companies grow and become profitable. First you do this by lowering the bar (and corporate tax rate) and incentivising companies to become profitable in the first place, rather than stay south of the borderline. You also crack down on tax evasion, which disincentivises companies from staying unprofitable as to benefit from tax exemptions on expenses without paying taxes on revenues.

Exceptions might be made, but again, the unprofitable small business should be the exception rather than the rule.

7. "None of its recommendations will be adopted by the DPJ." Isn't the point of writing an op-ed to raise issues that have not but should be considered, rather than narrate what the party is already likely to do?

The vision thing

On Tuesday the Council on Economic and Fiscal Policy (CEFP) released the 2009 Basic Plan for Economic and Fiscal Reform (known colloquially as the honebuto), available here along with other documents from the Tuesday meeting.

The plan is controversial because the Asō government appears to have sidestepped an existing agreement — originating in the 2006 honebuto — that social security spending would be capped at 220 billion yen, a figure that the general account budget is rapidly nearing. Social security spending is by far the largest portion of the budget and a major contributor to the government's deficits, hardly surprising given Japan's demographics. Needless to say, central to the fiscal crisis of the Japanese state is figuring out how to bear the burden of providing for Japan's elderly without bankrupting the state or wrecking the economy. At the same time, the LDP has struggled to undo the damage done to the party by the Abe government's mishandling of the 2007 pensions scandal — and so, as with many other recent government and LDP documents, the 2009 honebuto stresses economic security alongside economic vitality as a goal of reform. Years of polling show that the state of social security is the Japanese public's top policy priority. The LDP cannot afford to look weak on social security as it did in 2007 if it is to have the slightest chance of winning this year's general election.

How did the Asō government resolve this tension? It punted, withdrawing the clause limiting social security spending to 220 billion yen but insisting that the government still views solving the fiscal crisis as a top medium- and long-term priority priority for the Japanese state. The new plan, for example, retains a provision that calls for annual three percent cuts in public works spending. The government will also continue to economize in other areas (which will undoubtedly undermine the effort by LDP conservatives to ratchet up Japan's defense spending).

This single episode says much about the decay of LDP rule.

Press coverage of the Asō government's decision has focused on the role played by members of the LDP's education, and health and welfare policy tribes (zoku) in pressuring the government to abandon the social security ceiling and other spending limits. "A free for all for zoku," an anonymous source told Sankei. Mainichi noted the role played by the zoku and added that Prime Minister Asō was missing in action in this debate. Naturally both of these factors are important in explaining why the Asō government softened its approach to the fiscal restraint. But it is useful to step back from the interplay of personalities: this episode shows the irreconciliable forces tugging at Asō and the LDP more generally. Asō, like Fukuda before him, is struggling to weave his way between economic reformists and traditionalists, between fiscal hawks and spendthrifts, between budget cutters and tax hikers. While at various points Asō has attempted to distance himself from Koizumi and "neo-liberal" reformism, he has stopped short of committing to an approach that is anything more than a balancing act between the competing pressures present within the LDP. The LDP cannot make up its mind what kind of party it wants to be — and unfortunately for Japan, that schizophrenic party has an outsized role in shaping government policy.

Notice that this failure of vision on the part of the LDP has nothing to do with the bureaucracy, the favorite scapegoat of the structural reformers. If the LDP had a vision for governing — or if ruling politicians could impose a vision on the LDP — the bureaucracy would not have nearly as many opportunities for mischief and malfeasance.

In other words, just as the DPJ intensifies its plans for a possible power transition, the LDP has provided an excellent demonstration of how not to govern.

Recipe for disaster

The more I look at the new Fukuda cabinet and its first days in office, the more I'm convinced that the Fukuda cabinet is, in MTC's words, designed to "set up the LDP for a wipeout in the next House of Representatives election."

In bringing Kaoru Yosano into the cabinet while also giving Nakagawa Hidenao a post as the head of the LDP's national strategy headquarters, Fukuda Yasuo has merely guaranteed that the LDP's divisions have been transposed onto the national government.

For the moment, all the government and LDP may be "Nakagawans" now — in that the emphasis will be on growth and reform — as Mr. Nakagawa triumphantly notes at his blog. Machimura Nobutaka, speaking on TV Sunday, noted that due to slowing growth (not to mention a general election within the next year), a consumption tax hike would be "difficult." Aso Taro, the new LDP secretary-general, echoed the chief cabinet secretary in a press conference Tuesday at which he declared that achieving a balanced budget by 2011 is fine as a goal, but with economic conditions worsening, fiscal measures will take priority over budget balancing.

In case there was any doubt that Mr. Aso would abjure from playing a policy role in the new government, Mr. Aso has quickly demonstrated otherwise. As the runner up in last year's leadership election, it could hardly be otherwise. It appears that Mr. Aso will use this time in the spotlight to put the lessons learned on his travels to use, burnishing his credentials on economic matters. At his press conference, for example, he said, "In Tokyo [the arrival of a recession] hasn't really hit home, but in the rural areas that I visited I think there is absolutely a recession."

(He also demonstrated that he is still capable of outrageous remarks, in this case demonstrating that Godwin's law also applies to the nejire kokkai.)

But Mr. Aso's policy activism will only muddle the waters further. Just because Mr. Nakagawa has the upper hand does not mean that Mr. Yosano intends to stop his campaign for a consumption tax hike, even as he will be responsible for drafting the government's economic plans (although, as a minister without portfolio, he will not have to oversee their execution).

It appears that the new government's goal is to overwhelm opposition and public with the impression of action. The economic plans to be prepared by Mr. Yosano — although Mr. Nakagawa may have the greatest influence on their shape — will likely ensure that certain important LDP constituents see more money in their pocket and relief from price increases (support for small- and medium-sized business for example), in time for the next general election. Naturally Koga Makoto will revise his prediction of a general election just before September 2009 depending on just how much voters are convinced by the government's blitz.

Will the voters buy it? Will Mr. Fukuda and company be able to develop a program that works and is politically popular? Will the members of the Fukuda cabinet and the LDP leadership be able to work together enough to assemble and implement said program? Will the government try to coax the DPJ into cooperating on an economic stimulus program?

Whatever approach it adopts, it is hard to ignore the impression that the Fukuda government is preparing to act first, think later.

No taxation without representation

Asahi published a poll today addressing the consumption tax issue, and found that 72% of respondents want it to be a point of contention in the Upper House election.

This, remember, is the issue that Mr. Abe insisted, early in his cabinet, would not be discussed until autumn 2007, safely after the Upper House elections (safely given the history of consumption tax hikes and LDP election returns — 1989 in particular comes to mind).

The Japanese people are right to demand that the government, when facing the voters, actually discuss a policy that it intends to go ahead and consider anyway once the voters are safely out of the way.

What does it say about the government that it is afraid to put its policies before the people at election time? This tendency to be less than honest with voters especially at election time (due, I think, to assumptions that the people will misunderstand or otherwise misinterpret a policy) is a profoundly undemocratic trait of democratic governments around the world — it is hardly unique to Japan. In some way I think the Bush administration's low opinion of the American people led the administration to hype the WMD angle, instead of pushing the regime change/democratization argument to the front and taking the risk that the American people might be skeptical about an invasion launched primarily for democratization. On a less catastrophic note, this tendency also sparked last year's riots in Hungary.

But the universality of the tendency of democratic governments to mask their policies because they don't trust their peoples does not excuse the Abe Cabinet's pushing this issue back. If the cabinet thinks that raising the consumption tax rate is right, then it should have to explain its reasoning to the people. The Asahi poll suggests, in fact, that the public's opposition to a consumption tax rise may not be nearly as implacable as the government fears. It found 40% of respondents think it necessary, while 51% find it unnecessary. That's certainly not an impossible margin to overcome. Imagine if the government had decided to raise this issue itself earlier in the year — instead of spending an inordinate amount of time on the vanishing constitution issue, for example — and committed significant political capital to explaining why it's necessary (with Yomiuri following right along, of course). Instead of being a political liability, the tax issue could have been an asset, or at least an example of the government's taking its responsibilities seriously.

Just another example of how the Japanese people deserve better — and why the Abe Cabinet and the governing coalition deserve to be dealt a major defeat by the people.

Abe reverts

I have previously discussed how the Abe Cabinet has reverted to form in the cabinet's relationship with the LDP; I have also discussed how Abe has essentially put his predecessor's structural reform ideas on hold.

Asahi picked up this narrative on Sunday, in an editorial on the government's recently issued fiscal policy draft proposal, asking whether it gives one the feeling that "dependence on the bureaucracy is returning." Echoing an argument I've made before about Abe's various reforms, the reforms proposed here (daylight savings time, targets of labor productivity, raising the minimum wage), while good and in and of themselves, hardly constitute structural reform. In the lurch, Asahi argues, the bureaucracy is regaining its former power — meaning an end to drastic change to Japanese economy and society.

The editorial is particularly harsh on budget cuts: the draft includes an overall percentage by which to cut, but leaves the details unstated, which means a role for the Ministry of Finance to fill in the blanks.

While Asahi is right to point out the "reversion," one should not look back at the Koizumi Cabinet through rose-tinted lenses. Koizumi also allied with the MOF bureaucracy to push through budget cuts. And while the Council on Economic and Fiscal Policy (CEFP) was a promising source of reform ideas, it was often ineffective precisely because it had to rely on bureaucracies to move its plans. (Both points are well discussed in Aurelia George Mulgan's Koizumi's Failed Revolution.)

The other point is that the decline in the power and prestige of the bureaucracy as a result of scandals and mismanagement during the 1990s, and the subsequent rise in the stature of politicians and the premiership is not automatically a boon. One of the lessons from the career of Matsuoka Toshikatsu is that a weakened bureaucracy became easy prey for unscrupulous politicians like Matsuoka, who bullied and cajoled bureaucrats to do his bidding. Political leadership alone is not enough. Bureaucratic subordination is not enough. The relationship between politicians and bureaucrats must be clarified, roles clearly defined, and each held accountable for their actions.

But doing so will take the courage to take on both bureaucrats and the LDP's policy organs — and Abe has been unwilling to do either.