(Editor’s Note: The years from 1991 to 2001 are known as “The Lost Decade” in Japan. After years of rapid growth in the 1980s, the Japanese economy fell into a prolonged slump marked by persistent, high unemployment, low growth rates and erratic monetary policy. (See “The Lost Decade” for additional information on this.)
In recent years, Japan’s economy has somewhat rebounded but as economist Hiroshi Yoshida explains below, new issues are now arising that call into question Tokyo’s increasing debt. One of the problems he identifies is present here in the US as well, namely, “Not enough people stand up for future generations when it comes to fiscal policy.”)
The only transactions that can happen in a market are ones where both parties mutually benefit and can say arigatо̄ (thank you, in Japanese) as a result. By using accounting to examine such transactions we know that both parties’ utility increases; both are better off as a result of completing the transaction. On top of that, people are not worse off than they were before should they decline to engage in a given transaction.
Here in Japan, we must also reject the notion that we can rack up the national debt and use it as a source of financing. Yet future generations don’t have a say in what the government does here and now. Not enough people stand up for future generations when it comes to fiscal policy. In 1965, Japanese government bonds (JGBs) were issued to cover a revenue shortfall of 5.3% of government spending. Last year in 2021, that increased to cover 40 percent of government spending. The outstanding balance of government bonds issued on an ongoing basis is now twice Japan’s GDP.
When the market is allowed to function it determines interest rates, the rate at which people can borrow capital. If the economy does not grow, it is not possible for a borrower such as the Japanese government to pay back a loan with interest.
The 1492 Summa de arithmetica, written by Italian mathematician Luca Pacioli (1445-1517), contains a mathematical law known as the Rule of 72. This rule states that if you divide a given interest rate by 72, you can find the number of years needed for the principal investment to double. That would mean it takes 10 years for an investment to double at a 7.2 % interest rate. Let’s try this with an electronic calculator to see if it really works. Enter the number “1” and hit “x” button twice, and input 1.072 (a 7.2% interest rate). Hit the “=” button 10 times. The initial value ends up doubling, doesn’t it? When Japan started to stray from a balanced budget (1972-1987) the interest rate on JGBs was around 8%.
By lowering interest rates, the government’s interest payments have become smaller and the future value of money has decreased. The Bank of Japan holds more than half of the JGBs issued by the Japanese government. And now, as both the rate and value of the yen against the US dollar begins to fall, prices have started to rise. The price of iPhones in Japan is going up 20 percent this month.
Where there is good politics, people gather. That is to say, people vote with their feet, as my friends in America know from inter-state migration. Japan’s fiscal mismanagement and massive national debt violate the principles of democratic fiscal responsibility. As a result, Japan is losing its lure and appeal to future generations and the birth rate continues to plummet.