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Fitch downgrades Japan. Tsunamis and nuclear meltdowns take a back seat to austerity

Paul Krug­man had a piece from last week about the stark diver­gences in eco­nom­ic per­for­mance amongst some of the major indus­tri­al­ized economies in the first quar­ter of the year. The coun­tries that drank the aus­ter­i­ty kool-aid are, of course, in the bot­tom of the pack (aus­ter­i­ty kool-aid is the worst fla­vor around...not only does it kill you but it taste like shit too). Inter­est­ing­ly, at the front of the pack was Japan with a robust %4+ annu­al­ized growth rate. And why is that? Well, in part because Japan was so phys­i­cal­ly dev­as­tat­ed by the tsuna­mi and Fukushi­ma dis­as­ters last year that the clean up effort could­n’t help but pro­vide a large stim­u­lus to the econ­o­my. As Krug­man puts it:

May 17, 2012, 7:35 am
Spend­ing and Growth
Paul Krug­man


So Japan, which is spend­ing heav­i­ly for post-tsuna­mi recon­struc­tion, is grow­ing quite fast, while Italy, which is impos­ing aus­ter­i­ty mea­sures, is shrink­ing almost equal­ly fast.

There seems to be some kind of les­son here about macro­eco­nom­ics, but I can’t quite put my fin­ger on it ...

Yes, there does indeed seem to be a les­son here about macro­eco­nom­ics and the impor­tant role gov­ern­ment spend­ing can play on the abli­ty of coun­tries to with­stand and bounce back from major nat­ur­al and finan­cial shocks. After­all, the caus­es of the euro­zone crises are large­ly all in their heads — some of them dick heads — with a housing/financial bub­ble cou­pled with unad­dressed euro­zone structural/currency union issues at the core of the cri­sis. It’s not like the con­ti­nent expe­ri­enced a mas­sive nat­ur­al dis­as­ter and a mul­ti­ple nuclear melt­downs. Japan, on the oth­er hand, is still fac­ing an ongo­ing melt­down sit­u­a­tion and yet it’s out­per­formed the rest of the devel­oped world. So there does indeed seem to be a les­son here and, unfor­tu­nate­ly, that les­son appears to anger the finance gods. Sac­ri­fices must be made:

Fitch Down­grades Japan’s Sov­er­eign Rat­ing
Pub­lished: May 22, 2012

TOKYO — The rat­ings agency Fitch on Tues­day low­ered its assess­ment of Japan’s sov­er­eign cred­it to A+, an invest­ment grade just above the likes of Spain and Italy, and crit­i­cized Tokyo for not doing more to pare down its bur­geon­ing debt.

The down­grade, Fitch’s first for Japan since 2001, under­scores the sheer scale of the country’s debt bur­den, as well as polit­i­cal and demo­graph­ic chal­lenges that have ham­pered efforts to tack­le it.

Japan’s pub­lic debt will hit almost 240 per­cent of its gross domes­tic prod­uct by the end of the year, Fitch warned.l

The new rat­ing also height­ens the pres­sure on Prime Min­is­ter Yoshi­hiko Noda to rein in spend­ing and raise tax­es at a del­i­cate time, when the Japan­ese econ­o­my is still recov­er­ing from nat­ur­al and nuclear dis­as­ters last year.

Mr. Noda has warned that Japan could even­tu­al­ly face a debt cri­sis akin to that afflict­ing Europe and is stak­ing his job on a plan to dou­ble the con­sump­tion tax rate to 10 per­cent by late 2015. That increase, he has argued, is nec­es­sary to pay for soar­ing wel­fare costs and pen­sion pay­ments.


Fitch said that a lack of new poli­cies to sta­bi­lize pub­lic finances could lead to a fur­ther down­grade. But it also said that progress in fis­cal pol­i­cy beyond expec­ta­tions, or marked­ly stronger eco­nom­ic growth, could lead to bet­ter rat­ings.

In a report pub­lished Tues­day, the Orga­ni­za­tion for Eco­nom­ic Coop­er­a­tion and Devel­op­ment joined in the fin­ger-wag­ging over Japan­ese debt, urg­ing Tokyo to stick to its plans for a tax increase.

A detailed and cred­i­ble fis­cal con­sol­i­da­tion plan, includ­ing both rev­enue increas­es and spend­ing cuts, is essen­tial to main­tain con­fi­dence in Japan’s fis­cal sit­u­a­tion,” the O.E.C.D. said. “A top pri­or­i­ty is to imple­ment the government’s pro­pos­al to hike the con­sump­tion tax rate.”

On dear, with the IMF and the O.E.C.D. sneez­ing aus­te­ri­ons all over the place and Japan’s Prime Min­is­ter call­ing to dou­ble the con­sump­tion tax from 5% to 10% it looks like even Japan is catch­ing aus­ter­i­ty-itis too. Yes, Japan, time for aus­ter­i­ty. Dou­ble that con­sump­tion tax while inter­est rates are at record lows. Because that worked real­ly well the first time:

Finan­cial Times
Feb­ru­ary 12, 2012 7:37 pm
Europe can learn from Japan’s aus­ter­i­ty endgame

By Peter Tasker

The road to fis­cal hell is some­times paved with the best inten­tions. As Europe’s politi­cians seek to win elec­torates round to bru­tal bud­get cuts, they would do well to look to the expe­ri­ence of Japan, which shows how counter-pro­duc­tive aus­ter­i­ty can be in a post-bub­ble reces­sion.

When Japan’s bub­ble econ­o­my implod­ed in the ear­ly 1990s, pub­lic finances were in sur­plus and gov­ern­ment debt was a mere 20 per cent of gross domes­tic prod­uct. Twen­ty years on, the gov­ern­ment is run­ning a yawn­ing deficit and gross pub­lic debt has swollen to a sumo-sized 200 per cent of GDP.

How did it get from there to here? Not by lav­ish pub­lic spend­ing, as is some­times assumed. Japan’s exper­i­ment with Key­ne­sian-style pub­lic works pro­grammes end­ed in 1997. True, they had failed to trig­ger durable eco­nom­ic recov­ery. But the alter­na­tive hypoth­e­sis — that fis­cal and mon­e­tary virtue would be enough — proved woe­ful­ly mis­tak­en. Eco­nom­ic growth had been pos­i­tive in the first half of the “lost decade”, but after the gov­ern­ment raised con­sump­tion tax in 1998 any momen­tum van­ished. Today Japan’s nom­i­nal GDP is low­er than in 1992.

The real cause of fis­cal dete­ri­o­ra­tion was the dam­age done to tax rev­enues by this pro­tract­ed slump. Cen­tral gov­ern­ment out­lays as a per­cent­age of GDP are no high­er now than in the ear­ly 1980s, but the tax take has fall­en by 5 per cent of GDP since 1989, the year that con­sump­tion tax­es were intro­duced.


One final note:
Real­ly? You can’t be seri­ous.


2 comments for “Fitch downgrades Japan. Tsunamis and nuclear meltdowns take a back seat to austerity”

  1. Out­lays for pub­lic works, and I define that as actu­al­ly build­ing phys­i­cal things, have sev­er­al goals. They teach or rein­tro­duce job skills, they give peo­ple, young peo­ple espe­cial­ly. direc­tion and hope and pride. Ide­al­ly they should show a pub­lic prof­it in mak­ing trans­porta­tion and hous­ing cheap­er and eas­i­er or facil­i­tate oth­er busi­ness process­es in oth­er ways. Last­ly, they get the mon­ey flow­ing in a slug­gish econ­o­my. It’s all win-win to stim­u­late an econ­o­my from the ground up, instead of hand­ing cash, no ques­tions asked, to big thiev­ing banks and mil­i­tary con­trac­tors. Mary­land’s bril­liant (not) gov­er­nor’s plan is more gam­bling casi­nos.
    Con­trary to Fox’x scape­goat­ing of the poor as par­a­sites, peo­ple would rather work than not. The tax base will grow fast enough to cov­er the loans if the project are not delib­er­ate­ly designed to be boon­dog­gles and so dis­prove the con­cept.
    In one way or anoth­er the good solu­tions all reverse the flow of wealth to the top. They’re going to try to kill a bunch of us before they let that hap­pen.

    Posted by Dwight | May 25, 2012, 7:52 pm
  2. Well, that’s one “fis­cal cliff” avert­ed. Phew!

    Oh look, up ahead...there’s a chasm. Jump­ing into it sounds like a good idea.

    Posted by Pterrafractyl | November 15, 2012, 11:06 pm

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