Dr. Paul Sheard, managing director and chief economist for Asia at Lehman Brothers Japan Inc., says the Japanese economy is nearing the end of its cyclical recovery, but the government appears to be unwilling to intervene. In an interview with Asahi Shimbun senior staff writer Manabu Hara, Sheard said his primary concern is the weakening U.S. dollar. As for Japan's economy, he says the chickens will come home to roost next year.
I thought this part was interesting...
Q: Many Japanese would oppose your idea of expansionary fiscal policy because government debt is now equal to 160 percent of GDP.
A: I disagree with the whole public debate about government debt. The deterioration of the fiscal situation is the product of deflation driven by the prolonged bubble burst, which caused tax revenue to collapse. Government expenditure, which many see as the main cause of rising public debt, is actually a secondary factor.
Also, unlike the popular myth that public works expenditure is mainly responsible for the rise of government bond issuance, social welfare expenditure is the most important factor in this regard. The biggest problem to be addressed is not the fiscal deficit, but deflation. Getting out of deflation to generate adequate tax revenue would help solve the fiscal problem. Japan still has room to issue government bonds.
One has to notice that Japan runs a huge current account surplus, which is equal to 3.5 percent of GDP. What this means is that the public deficit can be entirely financed by the private sector's surplus. Bond yields in Japan are very low. What is clear is that the market is not sending a strong signal to the government that the debt problem is a key issue to be fixed.
Furthermore, one should look at debt in terms of net, rather than gross basis which is what frequently hits the headlines of newspapers. Net debt is the amount which can be obtained by deducting public financial assets from public debt. For instance, part of the reason why public debt is so huge is because the government engages in grand-scale foreign exchange market intervention in order to sustain the value of the yen while issuing financial bills to buy the dollar.
As a result, Japan now has U.S. Treasury notes worth $870 billion, which should be counted as an asset. Japan's net debt now is about 65 percent of GDP. It is still high, but much less serious than the number based on a gross basis.
Government bond issuance is certainly a problem from a narrow fiscal perspective, but not a serious problem from a broader perspective.
I don't quite understand that. Those dollars were bought with yen. Where did the yen come from? As well, other public financial assets can't readily be sold for cash, like bridges and roads.
, reform the pension system and make those Yakuza firms pay up, also try not electing right wingers like Governor blinky and LDP clowns...
