Europe’s Elections and Japan’s Public FinancesPolitics Economy
The emphatic rejection of austerity measures delivered by voters in the presidential election in France and the general election in Greece will have a complex influence on Japan, where government debt levels are more than 200% of gross domestic product and where moves had at long last begun to get the country’s public finances back in order.
An End to Austerity?
In Japan, the coalition government led by the Democratic Party of Japan submitted a bill to the Diet proposing to increase the consumption tax in two stages from its present rate of 5% to 10% by October 2015. Deliberations began on May 8. Addressing the parlous state of Japan’s public finances is an issue that has been on the backburner for years. It was the fiscal crisis in Europe, and the situation in Greece in particular, that finally pressed Prime Minister Noda Yoshihiko into taking action.
In France, however, François Hollande successfully campaigned against the government of Nikolas Sarkozy by prioritizing employment over public finances. In Greece, the ruling coalition has lost their majority. The European Union is in the process of changing course and is hammering out a new strategy for growth.
Meanwhile, former DPJ president Ozawa Ichirō has had his party membership reinstated after he was acquired at the first trial of charges relating to political funding violations. Ozawa is the linchpin of opposition to the proposed tax hike within the DPJ. Although the court’s decision is still subject to appeal, Ozawa’s return has given new impetus to the movement against the proposal.
Since the government does not hold a majority in the House of Councillors, cooperation from opposition parties will be essential if the bill is to pass. If opposition to the bill within the DPJ gathers substantial strength, however, it will be difficult for the Liberal Democratic Party, the largest opposition party, to support the government, even though they share the same opinion on the consumption tax issue.
Another factor is the equity and bond markets, which are averse to any departure from austerity policies following the election results in France and Greece, fearing a worsening of the economic chaos. Japan’s experiences in the 1990s are proof that using fiscal stimulus to get the economy to grow again after the bubble has burst is not easy in a mature economy.
Europe’s Troubles May Mean a Stronger Yen
Only 10% of Japan’s exports go to the EU. But more than 20% of China’s exports end up in EU countries, and China is Japan’s largest export destination. There are hints that the yen, which had finally started to stabilize, could once again appreciate in the foreign exchange markets. If the EU economy descends into chaos, the impact on the Japanese economy will be severe.
The consumption tax bill contains a clause stipulating that the tax rate increase will take place only if the economic conditions are favorable. Because of this, optimists may be persuaded that there will be no problem even if the economic conditions should worsen as the bill is passed. But from a political perspective, people will become increasingly skeptical about passing the bill if the economy shows signs of regressing.
The uncertainty surrounding the bill continues to grow.
(Originally written in Japanese on May 17, 2012.)