JGBs, not tax hikes, way to go, Sakakibara says

by Shigeki Nozawa and Monami Yui

Bloomberg

Japan should issue more bonds to help boost the economy instead of attempting tax hikes, which might stifle a recovery, said Eisuke Sakakibara, a former Finance Ministry official.

“The government shouldn’t raise taxes when economic conditions are bad,” Sakakibara, now a professor at Aoyama Gakuin University in Tokyo, said last week. “They should even stop discussing the plan because expectations for higher taxes in the future could alone have a negative impact on the economy.”

Prime Minister Yoshihiko Noda wants to double the 5 percent consumption tax to shore up the social security system, a plan that faces opposition within his own Democratic Party of Japan. An aging population and two decades of low growth have left Japan with a debt pile projected to exceed ¥1 quadrillion next year, the biggest in the world.

Forty percent of voters oppose Noda’s tax plan, compared with 46 percent who support it, according to an Asahi newspaper poll published Feb. 14. Noda has an approval rating of 28 percent, down 4 percentage points from January, the Mainichi newspaper said this month.

Former DPJ leader Ichiro Ozawa, who is on trial for violating campaign financing laws, repeated his opposition to the tax plan this month. Nine lawmakers left the ruling party after it approved a proposal to raise the consumption levy to 8 percent in April 2014 and to 10 percent in October 2015.

Noda’s plan is “a poor political decision,” said Sakakibara. “It’s obvious that a tax increase is a must to achieve fiscal reform in the middle to long term. Ozawa knows that, but what he emphasizes is that now is not the time.”

Sakakibara expects the sales tax will eventually be raised to 15 percent. A 20 percent level is also possible if Japan were to expand its social welfare system, he said.

The government needs to stimulate growth by boosting government bond sales before employing higher taxes to repair the country’s finances, Sakakibara said.

“Japan can continue to issue a huge amount of debt at least for the next four to five years,” said Sakakibara. A free-fall in bond prices “won’t happen. Japan’s fiscal burden is large, but household assets are even bigger.”

Sakakibara, 70, became known as “Mr. Yen” during his 1997-1999 tenure as vice finance minister for his efforts to influence the currency through verbal and actual intervention in markets. Japan sold yen in September 2010 for the first time since 2004, and it did so repeatedly last year after the March 11 calamity and a worsening debt crisis in Europe spurred gains in the currency.

The yen tends to strengthen in periods of financial turmoil because Japan’s current-account surplus frees the country from relying on foreign capital. The currency, which reached a postwar record of 75.35 on Oct. 31, has fallen more than 5 percent since the Bank of Japan unexpectedly expanded easing measures on Feb. 14. It touched 84.18 on March 15, the weakest since April 2010.

The yen may rally beyond 80 per dollar if the U.S. economy shows signs of softening after November’s presidential election and Europe’s debt crisis worsens, Sakakibara said.