1. An Economic Collapse of Japan Is Unlikely:

Is Japan the World’s Largest Debtor?

It is said that　Japanese Prime Minister Shinzo Abe has already decided to raise consumption tax. However, should he go ahead with his plan to increase the consumption tax from next April?

The Ministry of Finance has really wanted the tax to rise. It has even made the Minister of Finance, Taro Aso, say that an increase in tax should be thought of as an ‘international commitment’. Aso forced the Nikkei Shimbun newspaper to write that ‘Japan’s economy remains stable after having bottomed out.’

The Ministry of Finance has been arguing that Japan’s national debt has exceeded one quadrillion yen, which would have made it the world’s largest debtor. Given that fact, the ministry has insisted that Japan’s economy could collapse unless it was allowed to raise taxes.

An economic collapse could have caused an inability on the part of the Japanese government to pay back its loans. The Ministry of Finance first started to mention this danger in the 1980s; in 1995, the then Minister of Finance Masayoshi Takemura declared that Japan was facing an economic collapse. At that time, the government’s level of debt stood at a mere 225 trillion yen.

The Ministry of Finance must surely find it strange that, although they have continued to make the same remarks over and over again for the past 30 years, things have never turned out as they promised.

Economic Collapse Means ‘an Inability to Repay Government Bonds Issued in Foreign Currencies’

During his time in office, the Former Prime Minister Naoto Kan created a sense of crisis when he suggested that ‘Japan would become a second Greece.’ It has certainly been the case that Japan’s outstanding government bonds ratio to GDP has been approximately 250%, whereas that of Greece, which in effect experienced an economic collapse, has been around 150%. While the assertions of the Ministry of Finance and Kan have seemed reasonable, it would have been very strange if Japan had not experienced an economic collapse because the content of Japan’s and Greece’s loans are completely different.

Economic collapse, in its original sense, stood for ‘an inability to repay government bonds (foreign bonds) issued in foreign currencies.’ Greece’s government bonds were a kind of foreign bond issued in Euros. In the case of Argentina, which experienced economic collapse in 2001, it was unable to pay back its government bonds issued in U.S. dollars.

Japan’s government bonds were all issued in Japanese yen. The economic collapse of Japan has been thought unlikely in a sense because its bonds have not historically been foreign controlled.

Governments Differ From Businesses and Families in That They Can Print Money

In the case of government bonds issued in Japanese yen, the Bank of Japan, a subsidiary of the Japanese government, can just print money and buy up the government bonds. While the average person might find this concept hard to comprehend, governments can wave their magic wands and avoid having to pay back their loans and interest when they get their central banks to print money.

If municipalities, businesses, or families were to print their own money, they would be arrested for counterfeiting (Article 148 of the Penal Code of Japan) and thrown into prison. If the bank of Japan were to print money, then of course, the act would not have constituted a crime. Because this system has been put in place, it has been almost pointless to compare government loans with those of municipalities, businesses, and families. Government bonds, issued in a country’s own currency, have been the ultimate form of loan, and loans from other business entities have not been able to compare with them (while governments, of course, can’t print endless amounts of money, they do within the range for healthy inflation up to 4% per year).

It is not possible to use this kind of magic wand with government bonds issued in foreign currencies (or common currencies) as with Greece and Argentina. If they had printed euros or dollars, then it would have constituted a crime, which was why they could not avoid economic collapse.

Economic Collapse Cannot Occur With Government Bonds Issued in a Country’s Own Currency

This principle has been witnessed throughout history.
For example, after Britain fought in the Napoleonic War, its outstanding government bonds reached nearly three times its GDP. Britain did not experience economic collapse, despite having had a situation that was worse than Japan’s current debt financing.

Meanwhile, Britain’s economy, in effect, collapsed after the Second World War. It had invested six times its GDP in war expenses, which it covered with loans from the U.S. The loans, which it received from the U.S., were of course largely issued in dollars. Following the war, it was forced to break up its large naval fleet and to sell off its aircraft carriers and ships to pay off those loans.

Thus, you can tell the huge difference between the government bonds issued in one’s own country’s currency and those bonds printed in foreign currencies.

2. Japan’s Citizens and Government Are the ‘Richest in the World’: Support From Japan’s Hard-Working Citizens

We can express this difference in terms of how hard the general public is willing to work.

The citizens of Greece have been unable to supply themselves with sufficient quantities of things to consume within their own country. Thus, they have been purchasing many things from other countries. Since the people of Greece have not been making much money, the government’s tax revenues haven’t been able to increase and the people have had very little in the way of savings. Since the government, which found itself in the red, wanted to borrow more money, and it had been unable to raise the necessary funds domestically, Greece borrowed cash from overseas financial institutions.

Aside from natural resources, the people of Japan have been able to supply themselves with the majority of things. In addition, they have been able to save money through the sales of exports to other counties, especially in the manufacturing industry. This has been built into personal financial assets worth in the region of 1.5 quadrillion yen, which have been invested in government bonds through such avenues as private banks, insurance companies, and the Japan Post Bank. Japanese families have had a tendency to hold their financial assets in deposits and savings accounts, the total of which currently stands at over 800 trillion yen. This number is 1.5 times more than the deposits and savings accounts of all American households put together, and 1.2 times more than the people in the Eurozone. This hard currency is a boost for Japan’s government bonds.

While the Ministry of Finance and the mass media might have whipped up a storm with their claims regarding how each Japanese national has been shouldering 8 million yen in debt, people should have viewed this case as one where the resourceful people of Japan have been happily lending their government 8 million yen each.

The Japanese people have not only been lending money to their own government. They have also been advancing money to overseas parties. It’s a fact that Japan is the richest country in the world because it has loaned out the highest amount of money in the world.

Japan’s government bonds, which have been supported through the diligent work and savings of the Japanese people, have made Japan the country least likely to experience an economic collapse.

The Japanese Government’s Assets Are Greater Than Its Loans.

A little known fact amongst people both from Japan and other countries is that the Japanese government, not only the people of Japan, is the richest in the world. The Japanese government’s pure debt (net liabilities), which deducts government-held financial assets such as U.S. national bonds, is over 300 trillion yen. If fixed assets such as roads and buildings were deducted, then the amount of debt would be zero and the number of assets would also be larger. In the case of the U.S., if American assets were deducted based on outstanding debts, then the government debt would be over 1.4 quadrillion yen (14 trillion dollars) higher.

No matter how much the Ministry of Finance has been screaming about shouldering debts of one quadrillion yen, from a global perspective, the Japanese government’s debts should have appeared as insignificant in light of its vast assets. The result of this situation has been that the long-term interest rates of Japanese government bonds have been the lowest in the world, at less than 1%. In other words, the Japanese government could raise extraordinary amounts of money at a very low cost. The fact, that Japanese government bonds are the securest and the most investible form of financial product in the world, has made them extremely popular with investors.

3. Why Has the Ministry of Finance insisted on Stirring Up a Sense of Financial Crisis?:

Mistakes Having Been Made After Pushing Forward With Austerity Measures and Tax Increases in Times of Recession.

In fact, these undeniable truths, that I wrote here, largely represented the same Ministry of Finance content that it released in a report published in 2002 on overseas credit rating agencies. The current Governor of the Bank of Japan, Haruhiko Kuroda, published the report in his name, which was why Kuroda, who backed the planned increase in consumption tax, was fully aware at the time that the Japanese economy would not collapse.

Why was the Ministry of Finance stirring up fears over a spurious financial crisis?

If we look at the history of financial authorities worldwide, we can see from the modern era onward that they have repeatedly made the same mistakes – that is, they have forced austerity measures at the wrong times and tax increases in the midst of severe recessions.

Following the Global Depression of 1929, which had its origins in the U.S., Japan’s Osachi Hamaguchi cabinet adopted austerity measures and monetary tightening that plunged the country into the Showa Depression and continued the negative growth. After the stock market crashed, America’s President Hoover left the banks and businesses to go bankrupt. While he forced through the introduction of a consumption tax as a means to rectify the government’s dire financial situation, within a year the GDP had halved, and 12 million people were out of jobs.

A similar thing happened in recent years with Japan’s Prime Minister Ryutaro Hashimoto. Despite an ongoing economic slump during the wake of the end of Japan’s bubble economy in 1997, he decided to increase the rate of the consumption tax. Within the next 15 years, Japan’s GDP dropped over 50 trillion yen, and average household incomes decreased over 1 million yen.

After Japan’s bubble economy burst, households, businesses, and financial institutions all worked tirelessly to repay their debts and to increase the soundness of their balance sheets. Therefore, a mood of financial prudence swept through the country, and people became reluctant to use money. Meanwhile, the government decided that it also wanted to repay its debts. This unfortunately had a painful trickle down effect in the form of a prolonged economic deflation during which people’s jobs and income fell.

In general, prices usually fall because vendors aren’t unable to sell their things. Prices become even lower the longer people hold on to money, which further compounds the difficulty in selling things. Therefore, economies shrinks. This is deflation. To raise taxes during such times makes it even more difficult to sell things. History shows beyond a shadow of doubt that to raise taxes during a period of deflation is the wrong course of action.

The ‘Ideologies of the God of Poverty’ Have Enveloped the World

Yet, it would seem that this cast iron principle has been forgotten. Since the Lehman Shock of 2008, ‘ideologies of the god of poverty’, like those witnessed in the U.S. during the aftermath of the Great Depression or those seen in the Hashimoto cabinet following the burst of Japan’s bubble economy, have spread throughout the world.

In an attempt to bring its financial affairs into order, in January 2011, the U.K. raised its value added tax (consumption tax) from 17.5% to 20%. The U.K. economy, which has been on the way to recovery since the Lehman Shock, fell back into negative growth. Revenue from not only value added tax, but also from income tax and corporate tax, has also continued to drop.

The E.U., in the midst of the Eurozone crisis, has also urged its member nations to adopt basic austerity measures. In the new Fiscal Compact, issued in January 2013, members were obliged to reduce their budget deficit to within 0.5% of GDP. This measure regrettably tied their hands. Even if they wanted to come up with flexible economic measures, they couldn’t.

In the U.S., confrontation between the Democrats and Republicans over the nation’s massive budget deficit has become an annual event. While President Obama has been continuing to promote infrastructure projects, such as the repair of deteriorating highways, as one form of economic measures, many Republican senators, who advocate a ‘small government’, have remained firmly in opposition to these kinds of financial expenditures.

The International Monetary Fund (IMF), which is supposed to make certain the global economy grows in a stable manner, also loves the notion of forcing countries to repay their debts. In August of this year, it made policy recommendations to Japan, in which it urged Japan to raise its consumption tax as planned, stating that it should have been raised to 15%. This kind of meddling was really unwelcome at the time. The Ministry of Finance seized upon it, and it’s now trying to push through an increase in the consumption tax.

Thus, the god of poverty has set up shop, right in the heart of politics in Japan and other countries around the world, and he’s pushing through austerity measures and tax increases. Japan, America, and Europe will create more deflation in their countries due to their contracting economies just as they did in the Great and Showa Depressions.

4. Is It Possible to Issue More Government Bonds?

Korekiyo Takahashi and Theodore Roosevelt Put ‘Absurd’ Expansionary Fiscal Policies Into Practice

Diametrically opposed policies saved the Japanese and U.S. economies from the depressions of the 1930s.

Both Japan’s Ex-Minister of Finance Korekiyo Takahashi and the Ex-President Theodore Roosevelt forced their central banks to buy government bonds and created jobs through sudden increases in government spending. They achieved a v-shaped turnaround from periods of economic contraction.

In his memoirs, Korekiyo Takahashi reflected on what happened back then as followed: “What happened when the amount of debt increased in one sense was that industry experienced major growth and there was an increase in national wealth, which was why an increase in the amount of government bonds presented no problems at all.” “People could generate wealth when they expanded the number of citizens at work, which rendered any prior debt irrelevant.”

Korekiyo Takahashi adopted a rational point of view when he stated that wealth (GDP) increased with enlarged tax revenues, after which temporary debt no longer presented a burden.

Roosevelt adopted the same line of thought. If people were to include the expenditures for the Second World War, Roosevelt escalated the amount of spending many times. As a result, in the space of a decade, the GDP rose four times, and the amount of debt to repay after the war was small.

While it was only temporary, such an absurd thing was possible because, as mentioned before, big differences in the ability to withstand debt between governments and households, businesses, and financial institutions existed. The central banks could have brought up government bonds issued in one’s own currency.

When it came down to crunch, the power of the people in the government was inordinately strong. Roosevelt was even able to admonish people with “the only thing we have to fear is fear itself.” Korekiyo Takahashi has also chastised narrow-minded government officials who thought solely in terms of financial soundness, “Intelligent people, who think that one times one equals two, and two times two equals four, have no inclination for finance in the real world.”

Hyperinflation Is Unlikely in Today’s Japan.

In Japan and the U.S., neither businesses nor households have been using money, and investments and consumption have decreased. Jobs have been becoming scarce. The only way out of this situation has been for governments to follow the lead of Korekiyo Takahashi and Theodore Roosevelt, and to invest money in the creation of jobs. As with Roosevelt, who increased the GDP fourfold during his term, when governments have wanted to invest in the growth sectors, they have had no problems doing so when they’ve issued larger quantities of government bonds (both the U.S. and Japan have been doing it to some extent).

If governments were to try it, though, the media would inevitably cry out that such actions could result in hyperinflation and might render money worthless. The Japanese media has done it.

However, unless a country’s production facilities were destroyed in some manner, such as through war, there would never be any sharp decline in the value of money. Hyperinflation refers to a drop in the value of money to around a hundredth of its value in the space of a year. In other words, a 10,000-yen note could have the prior value of a 100 yen coin.

A dramatic change of this kind could only occur if a war, a civil war, or some other kind of unlikely form of misgovernment resulted in the destruction of domestic factories and fields, and it brought about extreme shortages in supplies. France, which beat Germany in the First World War, had Germany’s industrial belt, known as the Ruhr region, occupied, and it lost most of its productivity, which was why the cost of commodities rocketed to absurd levels within the span of a year.

In the case of Japan, following its defeat during the Second World War, its domestic production facilities had sustained catastrophic damages. While hyperinflation did not occur; the value of money did decrease to one hundredth within the span of three years. Such a situation would be thought of as inconceivable in present day Japan, unless China were to attack Tokyo or Osaka with several nuclear missiles.

According to a certain economist, hyperinflation would occur if the Bank of Japan kept printing money and gave every person in Japan one hundred million yen. Therefore, the only way to cause hyperinflation would be for us to sit around and wait for the appearance of politicians of the highest possible incompetence imaginable.

Let’s Move Towards ‘Ideologies of Prosperity’ for the Creation of Global Wealth.

Japan possesses a level of productivity, especially in manufacturing, that bears no comparison to its level directly after the war. The people of Japan are renowned for their diligent work. As stated at the beginning of this article, Japan is unlikely to experience an economic collapse, and is also unlikely to experience hyperinflation during times of peace. At this point in time, there is no chance for the Japanese government to create new jobs and projects simply because they want to issue large quantities of government bonds.
If the Japanese government were to invest large amounts of capital in transportation infrastructures that could speed up the flow of people and things, or fund industries with future prospects, it would be able to ride out the global economic slump and to create new, key industries for the 21st century, which should replace automobiles and electrical machinery. In short, this issue should relate only to the effects of investments.
If the government were simply to increase the GDP by 10%, tax revenue of around the same amount as from a 5% increase in consumption tax could easily come back as a corporate or an income tax.
Those politicians, who wish to force through an increase in the consumption tax, should ask whether they wish to pass these debts onto their children’s generations. At the same time, as household incomes further decrease, a raise in the consumption tax at this point could also mean that the tax will rise to 20% or 30% in order to cover medical treatment and pension costs.
Japan now faces the choice of whether it’s better to leave future generations with heavy taxation or an even more prosperous society. This isn’t a problem for Japan only; rather, the world’s governments currently face the challenge of creating enough jobs at the global level to enable the world’s population, which is set to hit 10 billion, to put food on tables.
In the end, this problem comes down to whether people have the vision and desire to create a country that levies heavy taxes on its people for social security, or to further increase the size of economies many times over so as to support their lives.

“A national debt of one quadrillion yen!? What’s the big deal? ――　Prime Minister Abe needs a strong resolve. Since the U.S. President has the support of the world’s strongest military, he should have enough leeway to print dollar bills or government bonds. What we need now are ideologies of prosperity that will help affirm and create wealth rather than ideologies that support the spread of poverty.

(Jiro Ayaori)