Editorial: Ideas Later: Update Jan. 8, 2024.

 

Editorial: Reckless spending by Japan gov't won't dispel public's price hike anxieties

Article Source: https://mainichi.jp/english/articles/20231103/p2a/00m/0op/015000c

Article:

Living conditions in Japan are becoming increasingly worse due to continuing price hikes for food products and other commodities. Though the government on Nov. 2 decided to spend up to 17 trillion yen (about $113 billion) on economic measures, it won't be able to dispel people's anxieties over rising prices by splurging, and not using the money effectively.

The "Engel's coefficient," or the rate of spending on food in overall household expenditure, has sharply risen in Japan, with the average hitting the 27%-level from January to August this year -- the highest in about 40 years not including the period when COVID-19 was rampant. The figure exceeds 30% among low-income households, and support for these people is an urgent need.

Ideas:

Even in the US, despite inflation going down significantly, people, consumers, still don't feel that good about the economy and living conditions.

Usually among lower-income groups, they spend more on food, per capita, than the upper income groups.

The problem, might be, that Japan, and consumers, have gotten used to low prices and deflation, and still are not used to the increased inflation and price increases. It might take some time before the deflation mindset decreases.

While the extra budget is good and needed, its doubtful it will dispel people's anxieties and inflation has continued in Japan for several years, and a one time cash handout and a tax cut might give some needed temporary relief, it might not help in the long run.

Article:

Nevertheless, Prime Minister Fumio Kishida proposed an income tax cut that would extend benefits to high-income earners. This seems to be an attempt by Kishida to eradicate the impression of the government implementing tax hikes, but the role of supporting people's lives has been diluted.

Regarding the purpose of the tax cut, Kishida explained, "With the cooperation of the public and private sectors, there are positive signs of wage hikes. The goal is to completely break free from deflation." However, many companies have been forced to increase wages to cope with price hikes, rather than due to policy effects.

Ideas:

It seems like, maybe yes, maybe no, the tax cut is a political move due to the Kishida cabinet having low favorable ratings. But yes, it good for Japanese consumers if they can actually get the tax cut with not a lot paperwork.

Being able to "completely breaking from deflation" might take more than one tax cut and more than one cash handout as deflation, after decades, seems to be entrenched in the Japanese economy. Its a very complicated challenge and may take some time.

Wage hikes are important but the challenge is when companies increase wages, the same companies might then increase prices to pay for the wage increases.

And, again, as mentioned before in other commentaries, 70 percent of the Japanese workforce works for small and midsize companies, that didn't get a wage increase in April of 2023, and there is nothing that says they will get a wage increase in April of 2024.

Article:

Tackling economic inequality set forth in Kishida's signature policy "new capitalism" virtually remains untouched. The government has merely repeated makeshift responses, such as subsidizing gasoline prices. Even with multiple ad hoc policies, the path to improving people's lives is nowhere to be seen.

It is also questionable that a large number of public work projects has been included in the name of building national resilience. This could spur higher material costs and lead to a further surge in commodity prices.

Ideas:

In 2021, when Kishida became the new prime minister the term "new capitalism" came up but to be honest, its not clear exactly what it means. But yes, its good if  it means reducing income inequality in the Japanese economy. 

Most people think Japan is this "rich" country, but that is far from the truth. As Japan's per capita income is low among advanced economies.

In the past, the Japanese economy, was built largely on public works projects, and many of them, useless project, which were used by politicians to help their constituents. At the same time Japan's debt to  GPD has increased to the point that its now one of the highest among advanced economies.

Improving peoples lives might be a relative term, as maybe some groups, yes, are struggling and maybe some groups are not struggling with inflation as it is. This doesn't mean all are OK or all are not OK, but inflation is an individual situation, depending on what you buy and don't buy and what your home required expenses are such as energy costs and rent etc.

Article:

Although the government plans to make massive investments in funds supporting private businesses, this will unlikely lead to an improvement in people's lives. The economic measures are also said to provide a long-term boost to areas with growth potential, such as the strengthening of semiconductor production and the development of space-related technologies. However, there are many funds that lack transparency and are not being used effectively.

The government still has no self-restraint regarding fiscal discipline. It will withdraw money from the reserve fund of 5 trillion yen (roughly $33.3 billion), which can be used without deliberation by the Diet, to use for these economic measures. It is clear that the reserve fund is being used outside of its original purpose of preparing for natural disasters and has become a convenient money source for the administration.

Ideas:

Once again, up to 70 percent of the Japanese workforce works for small and midsize companies, which seem to have been left out, as usual, of any Japanese government support. 

But that is with many economies, that seem to support large companies but not small companies the same.

It doubtful that investments in semiconductors or space-related technologies is going to boost the sentiment of consumers or provide a boost to everyone in the Japanese economy, other than the geographic areas where semiconductor factories will be built.

As far as using funds other than where they were/are intended, seems to be rampant in most advanced economies, as they use it when they need it. Its like regular households, and what the intentions are related to savings and spending. A household might intent to same a certain amount, but an emergency or something comes up, they will use the savings as needed, And the same with governments and spending

Article:

Further issuing government bonds seems inevitable. The country has been spoiled by the Bank of Japan's extraordinary low interest rate policy and carries a debt of over 1,000 trillion yen ($6.65 trillion), but the monetary policy has been revised and interest rates are on an upward trend. The burden of interest payments could weigh heavily on Japan.

Future generations may have to pay for the worsening situation. If the government continues its reckless fiscal spending in order to boost its popularity amid a slump in its approval ratings, it can only be described as extremely irresponsible.

Ideas:

The ultralow monetary policy has been a positive and a negative for the Japanese economy. Yes, the Japanese government debt to GDP ratio is among the highest of advanced economies, but most of the debt is owned internally and not externally, which was not the case of Greece in 2010, which had more external debt to internal debt.

As a result, no other country is going to call in the debt, which is always a chance with the US debt, which owes a lot of bonds to other countries such as Japan and China. But for Japan, Japan owns its own debt and the Bank of Japan will just roll them over and issue new bonds to keep the government and economy going.

Again, Greece is a perfect example of too much debt. In 2010, Greece went to the EU central bank to get more funds to keep the government operating. But the EU said no, unless you provide us a new budget that shows how you are going to reduce your debt. 

It took several years of negotiations and finally they submitted a budget that was approved and the EU gave them the needed funds to keep operating the budget.

But what happened was almost a tragedy, as the Greece government reduced the pensions of senior citizens in Greece as a way to reduce the debt.

Unfortunately, this is a situation, years down the road, that could play out in Japan too.

Have a nice day and be safe!