For years, Japan has been the poster child for Keynesianism—and not in a good way. Its “lost decade” of economic stagnation is well known (at this point, it’s closer to two decades than one), and this is only the beginning of its problems. Japan has been running a large budget deficit for more than twenty years now, and its debt to GDP ratio is close to 200 percent. But despite these gloriously Krugmanesque accomplishments, the economy isn’t really growing, and it hasn’t been for a very long time.Now Japan is planning tax increases to address its massive deficits. The Economist reports that the Japanese parliament has defied observers’ predictions and doubled the consumption tax—one of the lowest in the developed world—to 10 percent (the increase will take place gradually over a three-year period). The tax has been something of a political third rail over the years, leading to the ouster of the two previous governments that dared raise the rates. (A consumption tax is economics-speak for something very like a sales tax.)As many analysts have noted, Japan may have few other good options:
Nonsense, retort the fiscal hawks. They reckon that unless Japan trims its public-sector debt, the huge stock of savings held by companies and households could vanish as quickly as you can say “capital flight”. In their view, the bond market is a bubble waiting to burst and, if anything, a doubling of the rate is not enough. The tax rise, says Takatoshi Ito of the University of Tokyo, “is the minimum they should be doing, but the maximum they can probably get away with.” He notes that as the population ages, Japan’s economic growth rate will weaken. So the sooner public finances are shored up, the better.Economists do, however, appear to agree on two things. First, the new tax legislation looks likely to give politicians plenty of room to stall in 2014 should growth not appear robust enough. Second, if the consumption tax is raised, then all the more reason for Japan to redouble efforts to promote economic growth, mostly through productivity-enhancing measures such as spurring foreign investment and entrepreneurship. Takuji Aida, an economist at UBS, a Swiss bank, believes that the government, if it is to ensure that the consumption tax is not viewed as damaging, is under pressure to do more to promote growth.
Via Meadia prediction: The economy still won’t grow. Japan has stoutly resisted the the kinds of microeconomic changes that could bring growth, and nothing that Japan’s notoriously timid political class has done gives any indication that this is going to change. Japan’s declining population, furthermore, would be a serious problem even in better circumstances; it’s hard to see things getting better any time soon.Japan was the China of the last generation: the economic superpower that was going to eat our lunch, wreck our trade, and replace the US as the major power in the East Pacific. There was a time in the Japanese bubble years when the Imperial Palace grounds in Tokyo were said to be worth more than the entire state of California.Trees do not grow to the sky, even in the Pacific Rim.