- In-depth Japan in the Post–3/11 Era: The Road to Rebirth
- The Sorry State of Japan’s Public Finances
- [2011.10.03] Read in: 日本語 |
Japan’s public finances had already taken a turn for the worse before the March 11 earthquake, but the situation is likely to become even direr as a result of the disaster. Nariai Osamu, a professor and former government official, considers whether Japan can sort out its fiscal mess while paying for its recovery.
In the wake of the earthquake and tsunami of March 11, Western credit rating agencies one after another made downward revisions in their assessments of Japanese government bonds. The reasons are not hard to understand. Japan’s ability to sustain its social security system had come into question even before the catastrophe, and the outlook for public finances was further darkened by various spending schemes introduced by the Democratic Party of Japan after it took power in September 2009. Moreover, the anticipated upturn in revenues had been slow to appear.
On top of this, the natural disaster made an expansion in government expenditures on recovery and reconstruction inevitable. When one also takes into account the burden on the government stemming from the damage and losses caused by the nuclear power plant accident, one can see that public finances are likely to be in desperate straits for decades to come. In the meantime, seeing what happened in Japan, people around the world became increasingly concerned about the risks of natural disasters, and nowhere are the risks higher than in Tokyo and other Japanese cities.
Such is the context in which confidence in the Japanese economy over the medium to long term suffered a setback. In this article, I will examine Japan’s public finances from the following perspectives: How did the Japanese government get into such poor financial shape? Could fiscal deficits cause Japan to become insolvent? Does Japan, like today’s Greece, pose a sovereign risk problem? And are higher taxes inevitable?
The Warped Shape of the Fiscal 2011 Budget
Data on the website of the Ministry of Finance give an overview of the structure of the general account budget for fiscal 2011 (April 2011 to March 2012), which is slightly over ¥92 trillion (*1). Figure 1 provides a breakdown. On the expenditure side, the largest category is social security, accounting for 31.1% of the total. Servicing government debt (interest payments and bond redemption) comes next (23.3%), followed by revenue grants to local governments (18.2%). These three categories together account for 72.6% of all expenditures. So the share of discretionary and policy-related spending is extremely limited.
On the revenue side, 47.9% of the budget is to be covered by issuing government bonds—in other words, by passing the bill to future generations. Tax revenues, at about ¥41 trillion, will cover only 44.3% of spending.
Source: Ministry of Finance data.
The warped shape of the budget can be seen in this heavier reliance on bonds than on taxes. As of the end of fiscal 2011, outstanding government bonds will reach ¥668 trillion, or 138% of gross domestic product (figure 2). And the combined total of the long-term debts of central and local governments will be on the order of ¥891 trillion (184% of GDP).
In addition to the general account, Japan has 17 special accounts, which are used to implement specified undertakings with revenue from specified sources, such as health insurance premiums and public pension contributions. When the special accounts are added to the general account, the government’s net budget for fiscal 2011 comes to ¥220.3 trillion. The authorities need to improve the transparency of the special accounts by elucidating the relationship between costs and benefits and disclosing the revenues and expenditures for each undertaking.
Source: Ministry of Finance data.
Funding Uncertainties In and After Fiscal 2012
In June 2010 the cabinet approved a fiscal management strategy aimed at securing the health of public finances over the medium term. (*2) It specifies that the administration in fiscal 2011 will make every effort to prevent the issue of new government bonds from exceeding the level of about ¥44 trillion and to hold the expenses in the “primary balance” (revenues minus expenditures, excluding debt-servicing costs and new bond issues) to a maximum of ¥71 trillion, the amount in the fiscal 2010 budget. In order to keep new bond issues at ¥44 trillion, the authorities drew on the “buried treasure” in the special accounts—reserves and surpluses—to come up with the ¥7.2 trillion in the general account’s “other revenues” category.
Difficulties in finding sources of revenue have mounted ever since the change of government in September 2009, when the Democratic Party of Japan moved into power. Arguments over the fiscal 2011 budget focused on pledges in the DPJ’s election manifesto, especially the child allowance and the direct income compensation payments to farmers. Another bone of contention was whether to keep the government’s share of funding for the basic pension, which is designed to cover all residents of Japan, at 50%. The financial mandarins needed to come up with ¥2.5 trillion in funding to maintain this funding as stipulated under the law introduced by the coalition government of the Liberal Democratic Party and New Kōmeitō; and they barely managed to do so by, for instance, drawing on surplus funds held by the independent administrative agency handling such activities as railway construction and reserves in the special account for foreign exchange funds. But there are no promising revenue prospects at all for the budgets for fiscal 2012 and thereafter, which now need to include considerable extra spending for recovery and reconstruction from the March 2011 disaster.
Looking at the expenditure-side causes of the worsening fiscal situation, we find that social security costs are ballooning. As a percentage of all general account spending, they swelled from 16.6% in 1990 to 31.1% in fiscal 2011 (figure 3). At the same time, outlays for public works have been scaled down over recent years. The expense of servicing government debt in fiscal 2011 is expected to fall slightly from a year earlier to ¥21.5 trillion, but that is because interest payments on the bonds should edge down from ¥10.0 trillion to ¥9.9 trillion. They will grow larger in the future if interest rates rise.
Source: Ministry of Finance data.
Professor at Reitaku University. Born in Shimane Prefecture in 1948. Graduated from the University of Tokyo, where he majored in economics. Completed his doctoral studies in international cultural studies at Tōhoku University in 1999. Joined the Economic Planning Agency and was posted to the Organization for Economic Cooperation and Development as an economist. Also dispatched to Brunei as a specialist by the Japan International Cooperation Agency. Author of Exploring the Japanese Economy and other works.
- Other articles in this report
- A Land Awash in DespairFour months on from March 11, journalist Kikuchi Masanori visited areas of Tōhoku devastated by the earthquake and tsunami that struck on that day. Meeting with residents and local leaders, he finds that they are desperate to bounce back from the tragedy and rebuild their lives.
- Crisis Management in the Aftermath of 3/11Kobe 1995 and Tōhoku 2011 were both earthquake disasters, but the first saw most deaths from fires and collapsed homes, while the second was a complex disaster involving a tsunami and nuclear power plant meltdowns. Former director of the Cabinet Intelligence and Research Office Ōmori Yoshio considers Japan’s crisis management in the light of these two events.
- Earthquakes and the EconomyThe question on many minds today is what economic ramifications the March 11 earthquake and tsunami will have. This article explores this issue by looking back on the major earthquake the country experienced in 1923 and again in 1995, and considering the impact of those earlier disasters on Japan’s economy.
- “Emergent Destruction” and Japan’s RevivalJapan now faces the challenge of recovering from the worst natural disaster it has experienced since World War II. But the country needs to do more than simply rebuild the areas hit hardest by the March 11 earthquake and tsunami, argues Professor Yonekura Seiichirō. In this article he critiques the status quo and outlines a vision for a new nuclear-power-free, low-carbon Japan.
- Six-Month Timeline Since the Great East Japan EarthquakeOn March 11, 2011 a massive earthquake and tsunami struck the northeast of Japan. While the people of Japan responded calmly to the disaster and private-sector companies were quick to take part in recovery efforts, the government and the Tokyo Electric Power Company (TEPCO) were widely criticized for a sluggish and ineffective response. This timeline looks back on the half year since the disaster, with a focus on the government response to the nuclear disaster.