Has Japan now endgamed both her fiscal deficit and her economy?

28th December 2011 by Shaun Richards

As much of the Western word returns back to work after the Christmas break it sees news from a country which does not celebrate at this time of year. The land of the rising sun has not only given us new economic news but also several factors to consider in its planned budget for the next fiscal year. However before I do I would like to take you back a year to December 30th 2010 when I considered the strength of the Japanese Yen.

Yen Currency Strength

Back then the Yen was at 81.5 versus the US dollar and as I type this it is now at 77.7 so in spite of the concerted central bank intervention after the tsunami in March and the more recent efforts by the Bank of Japan alone the Yen has risen by 4.6% against the US dollar in 2011. This comes on top of a rise from 93 to 81.5 in 2010. Against the Euro the Yen has been even stronger as it has risen by 6% from 108 to 101.6 as I type this.

Against the pound sterling the Yen has risen too although there is an implication for the performance of the pound in 2011 that it has fallen by the least against the Yen as it has only dropped from 126 to just under 122.

Japanese industrial production

Back on October 28th I discussed a worrying development in Japanese industrial production.

Industrial Production in September decreased 4.0% from the previous month, showing a decrease for the first time in six months. It showed a decrease of 4.0% from the previous year.

This was worrying partly because this is not what usually happens in an industrial powerhouse like Japan and also because after the problems created by the tsunami in March we were continuously being told that her economy was growing strongly. There was a recovery in October when seasonally adjusted industrial production grew by 2.2% and the September decline was revised down to -3.3%. However the fall in industrial production returned in November according to the Ministry of Economy Trade and Industry.

Industrial Production in November decreased 2.6% from the previous month, showing a decrease for the first time in second months. It showed a decrease of 4.0% from the previous year.

Back on October 28th I gave some context for these numbers by looking at the overall production figures.

If we look at the absolute numbers here where 2005 is a base level of 100 we see that the seasonally adjusted index for industrial production is 89.9 and for context this measure was at 93.7 in August and 93.2 in July.

That same seasonally adjusted index for industrial production is now 90.1. So not only has there been very little growth over the past two months but Japanese industrial production remains approximately 10% below what it was in 2005. Even the Ministry itself has changed from telling us this.

Industrial Production is on a recovery trend after the Great East Japan Earthquake.

To this

Industrial Production appears to be flat

Japanese disinflation continues

Regular readers will be aware that falling prices have been a persistent feature of Japanese economic life during the period of the (two) lost decade(s). Such disinflation may be picking up again as shown by this figures from the Japanese Statistics Bureau.

The consumer price index for Japan in November 2011 was 99.4(2010=100), down 0.6% from the previous month, and down 0.5% over the year.

You may note the re-basing of the index to 100 in 2010. Usually countries do this to try to hide rises in prices whereas such a move in Japan would be to hide how long they have been falling. So we have another area where you need to metaphorically put up a mirror to Japan’s economy to relate it to most Western ones.

But it is not true that no prices rise in Japan and we need to remember that price indices are some form of average. If we look deeper into the numbers we see that fuel light and water charges have risen by 4.9% over the past year. So we see that Japan has not completely avoided the effects of the commodity price boom and we also see that other prices must have fallen faster than the overall index.

There is food for thought here for the Bank of England and its policies as Japan has combined for a long period something it is terrified of , falling prices, with something it wants, export success, for a long time.

Consumption is weak too

Japan produces several measures of consumption but here as an example are her average figures.

The average of consumption expenditures was 295,066 yen, down 4.7% in nominal terms and down 4.1% in real terms from the previous year.

Not entirely reassuring is it? Also as I have pointed out many times before weak consumption figures have been a feature of the lost decade experience. If we look at the underlying index for consumption for two or more person households it is at 96.3 where 2010 is 100. The figures are usually strong in December but there is some catching up to do merely to get back to 2010 levels. Indeed as I compared this year to past years I had to go back to 1986 to find a weaker underlying index number for November.


These numbers show that after the surge in economic growth in the third quarter of 2011 (1.5%) there are much harder economic headwinds for the fourth quarter for Japan and on cuurent trends it is the third quarter performance that looks an aberration. There are other factors to be considered such as the tsunami’s ongoing impact on energy production and the floods in Thailand which have affected Japanese suppliers but even so the trajectory does not look optimistic. I would like readers to keep those facts in mind as they read the next section.

Japan’s planned budget for 2012

There are various concerns with Japan’s planned budget for 2012 but I would like to draw your attention to one factor which bothers the Japanese themselves. They plan to borrow 49% of their public expenditure in 2012 and even worse the borrowing (44 trillion Yen) will exceed the expected tax take of 42.3 trillion Yen. As you mull over the implications of borrowing more than your income let me point out that this is for the fourth year in a row and that these numbers are optimistic as some borrowing has been omitted and the tax take assumes tax rises which have not yet happened.

How has this happened?

I looked up some comparable numbers and the situation is that Japan is a low tax economy. Her total tax take is approximately 17% of her economic output. I looked up comparable numbers from the UK Office for Budget Responsibility and saw that the expected tax take in the UK is just over 36% both this year and next. In the UK revenue from all forms of  employment (total revenue from income tax and national insurance) is at 17% the same as the total Japanese tax take.

So I will leave you today with three questions.

1. How much has the low tax take contributed to Japan’s economic growth?

2. If you look at her economy which is showing signs of weakness how can she raise taxes (as planned) without weakening her further?

3. Do the implications of the questions above imply that she may be end-gamed?


14 thoughts on “Has Japan now endgamed both her fiscal deficit and her economy?”

  1. JW says:

    Hi Shaun, hope you had a great Christmas.
    I will have a go at trying to give possible explanations to your questions. Not answers, but possibilities.
    Japan is a ‘controlled’ society. There is a sort of social deal which includes the ‘welfare state’, which underlies all of this. Tax is low as a quid pro quo for the population supporting the national debt.  I don’t think this low tax rate has much to do with its export/industrial success in the ‘western/incentive’ sense.
    It faces an age timebomb which is almost due. It is shifting to robotics as quick as it can to try to fill the labour gap.
    I would like to pose an additional question. As the welfare bill and government debt rises , will the social deal hold with the next generation? Perhaps its this fear that is making it plan on rising tax rates. If it doesn’t then as you say it is well and truely end-gamed.

    1. Anonymous says:

      Hi JW

      Thank you and the same to you.

      You make some very valid points. As to your question I wonder if the deal will get past this generation to the next. As one looks forwards beyond a six month time horizon then a lot could happen both good and bad but as we stand I think that Japan is indeed endgamed as the higher taxes she requires for her fiscal balance will be on such a scale they will affect her economy.

      It reminds me of the children’s game ker-plunk where you pull out straws and eventually the balls in the game fall to the floor, but which straw will be the last one?

      it would take only a relatively small rise in her government bond yields for the game to change entirely…

  2. Nemesisforpredators says:

    And, since Japan is so financially dependent on importing our commodities and on our importing her products, what are your explicit understandings for the rest of us, tied as we are into the worldwide endgame?

    Thanks again for your helpful, precise insight.

  3. Anonymous says:

    Japan has been slowly exporting its manufacturing capacity for many years now. At first it was just the manual assembly that went to China, the Philippines or Malaysia. Then the automatic assembly followed. 
    Whilst working in Japan, in several empty manufacturing plants used solely as stores and purchasing hubs. I noticed that they were training up Chinese and Malaysian Engineers to conduct design work. They are much cheaper than Japanese Engineers, something not lost on the Japanese Engineers training them. They are exporting their manufacturing, although the goods are still made in name by Japanese companies, the expertise is leaving, the job openings are no longer there. On every visit I made, there was always a party in the evening for some manager or other who was leaving. Something unknown in the past. The last one I saw left his position as the head of an Electronics department to join the rest of the family in rice farming, as it was seen as less stressful and safer, long term. Japan will polarise in social demographics, those in strong companies, selling their souls to earn very good salaries and the “rest”. A trend well established in other countries.

    1. Rods says:

      Very interesting.

      To me this just highlights the major changes and challenges, all Western countries face, imposed by the BRIC countries with their low cost base and wages. In this globalized world, their wages and cost base will rise over time, towards that of Western counties, but Western countries are going to have to meet them in the middle (or there abouts) to be competitive again. No politician will get elected telling the electorate this, so most people are in denial.

      There are going to have to be major changes in all Western countries to meet this challenge with lower Government spending, taxes, wages, land and property prices. Food and energy costs are going to be a much bigger percentage of a persons wages.

      I see that Brazil’s GDP has now overtaken the UKs, all part of the shift in economic power.

      I fear that the EU counties and particularly the Eurozone, with their sovereign debt problems, demographics, ever increasing worker rights and low growth rates is going to condemn Western Europe to being an economic sideshow as other nations power ahead.

      IMHO until these realities and challenges are faced, then western civilizations are going to continue to decline. 

      1. JW says:

        I think there are a number of inter-related factors at work. And basically there is little doubt that the majority of the debt-based growth over the last decade or more in most western economies will drain away leaving most 30% or so relatively ‘poorer’.
        There is though an enormous difference between Brasil a commodity based economy and the UK a ‘people-based’ economy. There is and will be for a long time a big difference in ‘wealth/individual’ on most any basis you care to measure it, in the UK’s favour. Also commodities tend to run out eventually.
        However the skills base of the ‘people-based’ economy is vital. The UK looks poorly equipped , at the moment, to compete in certain areas with other advanced economies. What the UK must not do is follow a ‘capital-enriching’ policy, but pursue a ‘people-enriching’ policy which majors in education and the ‘soft skills and services’ in which it excels.

      2. Anonymous says:

        In 1999 I was at a manufacturing conference held by our divisions parent company in the USA. We were discussing the relative costs of manufacturing electromechanical thermostats, often used in kettles and the like. US cost was $12/hr. UK cost was $7.50/hr. For the plant in Saint Lucia it was $1/day, and in China, we paid the factory owner a set fee per month regardless of how many where made.Labour costs did not come into the P&L sheet for that product if made in China. I mentioned to my colleague, that if all the workers were out of work, due to everything being made in China, then who would buy the product? not the unemployed workers, or the factory slaves in China, no money. I was called a luddite. The US/UK/Saint Lucia plants all closed as soon as Chinese production came on stream, which was within one year. 

        That is just a snapshot of one industry sector in the west. It has happened globally across all sectors. Short term gain, long term pain. China must develop a domestic market, because it cheap products have impoverished the very people who would have bought them!
        The parent company struggled to survive, as Chinese copies appeared eventually. It is now long gone.  Japan has been a bit cleverer, as it often keep new chips and products back from the international markets, so that Japanese companies would have an advantage over the overseas competition. Special purpose IC’s being held back for 2 years usually. But in their haste to get the “Benefits” of cheap production, that advantage is now lost. Who needs special ICs, when homemade circuits, using homemade components can be just as cheap? For homemade read Chinese. Whilst the West wraps itself up in red tape, regulations, patent disputes, and all the usual trappings of bureaucracy and litigation so beloved by the legal profession, the Chinese are not. The Chinese tree of wealth will grow and grow, as the pruned wrapped up bonsai tree of Japan and the west struggles to survive.

        I’m now an Independent consultant, my high flying globe trotting days well and truly over, I’m impoverished and business is struggling, thank god for tax credits!

    2. Anonymous says:

      Hi Akula and welcome to my blog.

      The trend that you describe is something that over time is likely to weaken the social contract that JW described above and perhaps will be one of the final straws for it…..

      For those who follow the ideas/thoughts of Richard Koo the social contract is if I may be so bold as to paraphrase his views a vital ingredient in how Japan has survived the lost decade.

  4. Anonymous says:

    Hi Shaun
    Just wondered where the 17% of economic output stat comes from. I have read OECD data which claim that in 2008 total tax revenue as a percentage of GDP was 28.1%. I also note Japan has one of the highest corporation tax rates in the OECD. COuld explain outsourcing and homeland decline.

    1. Anonymous says:

      Hi Shire

      Thanks for the numbers. I have just been searching on reuters for the factsheet they produced on the Japanese budget and cannot find it at present,so apologies.

      Just to add that I have been looking at the underlying numbers and some of the difference may be in how the tax is collected as it looks like the Japanese numbers only include central government taxes as by using the published numbers for the budget comes to around 10% of GDP….

  5. Anonymous says:

    Shaun – have an excellent new year and thanks for a most informative blog. George Bush had a theory that lower taxes stimulated economic growth and became ‘self funding’. The Japanese experience appears to contradict the lower taxes provides economic growth theory.

    To improve the Japanese budget I suggest aggressive raises in VAT. Many Japanese save lots of money in Japanese Government debt. I expect that VAT will reduce govt borrowing and probably reduce savings. It would also increase prices – reducing disflation. The Japanese finance ministry could try this plan and assess if it works – if it fails they can exit by reversing the VAT increases.

    1. Anonymous says:

      Hi Expat

      They do plan an increase in their sales tax but are struggling to push it through. Since I wrote this article it looks as though the impositon date of a higher sales tax has got pushed back 6 months to April 2014 which can be a slipperry slope…..

  6. Hi Shaun.. also remember that Fukushima is far from fixed, and may yet deliver another very nasty surprise. Anywho, here’s my 2012 predictions.. whadda ya think ?? 


    1. Anonymous says:

      Hi Mr.K

      I have had a quick look and think that 3 and 4 potentially clash. If the ECB mimics Benny and the Inkjets and pumps it up then we could could get the sort of stagflationary episodes we got this year.

      However I do expect deflation scare at some point and backed it up by selling some of my index-linked gilts a fortnight or so ago. I bought some extra for 2011 and they produced 18% (not bad in just over a year) and I hope to be able to get in again more cheaply.

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