Tuesday 17 Jul 2018 | 08:30 | SYDNEY
Tuesday 17 Jul 2018 | 08:30 | SYDNEY

Japan: Example or cautionary tale?


Stephen Grenville

17 February 2011 15:57

Having dealt with Japan's unique deficit problem in a previous post, what about the other countries (lots of them) who have clocked up large government debt, in many cases as a direct and indirect effect of the GFC'

The most interesting test case is the UK, which is adopting the opposite strategy to that of Japan, of sharply reining in the budget deficit even though the economy remains weak. Contrast the UK's raising of its VAT to 20% with Japan's VAT, still at 5%. This is such a daring approach that it seems amazing that some commentators are calling for tighter monetary policy on top of the fiscal austerity. The lower exchange rate might just save them. We wish them well.

As for the PIGS (Portugal, Ireland, Greece, Spain), these are hard calls. Continuing with large deficits, as Japan has done, is problematical when financial markets threaten to cut off further funding, when this debt is held by flighty foreigners, when the exchange rate is locked into the euro and when activity is flaccid (Spain has 20% unemployment). Some of them (Greece, Ireland) clearly need debt restructure. This is not the environment for Japan-style expansionary budgets.

What about the largest case, the US' It seems to be closer to the Richard Koo approach (see here and my previous post) than to the UK model. Sure, there have been budget cuts, but only in the discretionary non-defence part of the budget, making up only 12% of the total. Far from cutting 'entitlements', the US didn't even manage to put an end to tax breaks for the rich.

Washington's middle-of-the-road approach seems sensible: make serious promises to fix the budget deficit later (these might be more credible if there was some detail on the prospective spending cuts and tax increases), and let the deficit run for the moment. Americans must hope that it doesn't take two decades to sort it out.

Photo by Flickr user tanakawho.