How Japan handles its
government debt will have a bigger impact on the U.S. economy.
But at the end of the
day, even if Greece is forced out of the euro, the wider effects will likely be
manageable. If Greece were to suffer a banking crisis and severe recession, its
economy isn’t that large (roughly the size of Louisiana’s), and European
officials have done work to shore up the EU financial system so that it could
withstand the shocks of a Grexit.
But there’s another
economic drama unfolding nearly 10,000 kilometers away from the Mediterranean
that will be far more consequential. The slowly unfolding fiscal crisis in
Japan might not have the same entertainment value as the action in Athens.
After all, what’s more riveting (and deliciously ironic) than watching the
colorful and self-described Marxist Greek finance minister Yanis Varoufakis
battle it out with the world’s most powerful woman, and former East German,
Angela Merkel?
Nevertheless, the
situation in Japan, the world’s third largest economy, will have a greater
impact on the global economy in the years to come than Greece ever will. And
for aging Western Democracies like the U.S., watching what unfolds in Japan may
be like looking into a crystal ball of our own economic future.
Takatoshi Ito, an
economist at Columbia’s School of International & Public Affairs, argued at
a panel discussion on Monday that unless the Japanese government can raise its
sales tax to north of 15%, from its current 8%, Japan’s economy will suffer a
fiscal crisis sometime between 2021 and 2023. That’s because as Japan’s
population continues to age, its famously high savings rate will have to fall,
and the Japanese public will no longer be able to absorb the large amount of
debt the government is assuming.
Unlike Greece, the
Japanese government can print as many yen as it wants to pay its debts-debts
that are largely owned by the government, Japanese banks, and citizens. So
there’s no reason Japan would have to default on its debt. But all that money
printing, argued Ito, will lead to an inflation crisis and a serious decline in
the Japanese standard of living.
Ito’s co-panelist,
Japan scholar Gerald Curtis, doesn’t believe that the Japanese government will
raise the sales tax to 15% any time soon. Prime Minister Shinzo Abe’s decision
to delay a sales tax increase from 8% to 10% until 2017 is indicative of the
government’s inability to force such painful policies on the public. “It’s very
hard for me to see how we get from here to there,” said Curtis. If Both Ito and
Curtis are right, that means we’re just a few short years away from a fiscal
crisis in Japan.
Others are not so
sure. It’s been clear for two decades that Japan faces demographic
difficulties. Its low birthrate and cultural aversion to immigration means that
its working age population is shrinking at an alarming rate while the
population of non-working retirees (who demand expensive healthcare) is on the
rise. This dynamic has lead countless traders to bet against Japanese debt,
with disastrous results, even though the demographic predictions that led
traders to bet against the nation have come true.
So why hasn’t there
been a fiscal crisis in Japan, and should we believe prognosticators like Ito,
who continue to say it’s imminent? For economists like Paul Krugman, worrying
over a possible inflation crisis in Japan seven years from now is crazy when
you have a very real problem of stagnant growth and deflation right now.
At the same time,
problems like chronic inflation, and deflation for that matter, can crop up
unexpectedly and then be hard to thwart once they’ve reared their ugly heads.
Sure, the developed world’s main problem today is deflation, but Ito’s point is
that if you rely solely on the central bank to fund your debt for too long,
people will look elsewhere to store their cash. One need only look to the U.S.
economy in the 1960s and 1970s to see how quickly persistent inflation can turn
into a serious economic problem. As economist Christina Romer points out in a
2007 paper, the inflation during that period was partly the result of
policymakers’ overoptimistic assumptions about the U.S. economy.
It’s entirely
reasonable, given the developed world’s slowing productivity growth and Japan’s
shrinking population, that the economic growth we’re seeing is close to as good
as it will get. Ito’s point, then, is that we should be wary of delaying the
inevitable, simply raise taxes now, and admit that growth in Japan is just not
going to be that great in the coming decade.
No matter what happens
to Japan, the U.S. and Europe should pay close attention. Those economies must
also contend with the issue of slow growth and an aging population. How much
can government spending and central bank policy solve these problems? What
happens in Japan over the next decade should give us a clear answer.
(Πηγή: fortune.com)
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