As one of the most indebted countries in the developed world, the crisis unfolding in Greece is causing a moment of self-reflection for Japan.
But policymakers and economic advisers in Japan are not drawing an uncomfortable lesson about the need for fiscal discipline.
Instead they see Greece’s present predicament as a warning against being too tight with the public purse strings and the follies of mindless austerity.
“Greece raised taxes and cut spending but as a result has seen tax revenues fall for three straight years,” economy minister Akira Amari said last week.
“Greece was doing what it thought was necessary. In fact, it pulled itself into further suffering with its economy shrinking.”
Japan is a world away from Greece. It has a huge, competitive manufacturing industry, its own currency and large savings pool that allows the government to borrow mainly from domestic investors.
But the tiny European country still has some resonance for Japan which, like Greece, has delayed tough fiscal reforms and pension cuts as lawmakers worried about losing votes.
Japan’s debt-to-GDP ratio, at roughly 230 percent, is much higher than that of Greece’s 175 percent and is set to rise due to the ballooning social welfare costs of its rapidly aging society.
Susumu Takahashi, a member of the government’s top economic advisory panel, said the first priority should be to ensure it doesn’t kill off a budding economic recovery, rather than implementing spending cuts like those seen in Greece.
“They didn’t get the balance right,” he said. “What’s most important for Japan is to get the economy out of the doldrums,” Takahashi said Tuesday.
Some analysts, however, say the Greek crisis underscores the importance of curbing Japan’s borrowing when the economy is still in good shape and investors are fully confident in its ability to repay its debt.
“You get more room for policy flexibility if you get fiscal reforms done in a short period of time,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
“By focusing too much on the current state of the economy, you risk under-estimating the fiscal risks that may threaten future growth.”
Last week the government unveiled a blueprint on fiscal reform which, while advocating limited rises in spending over the coming three years, avoided setting mandatory caps on spending increases.
It was drafted by the Council on Economic and Fiscal Policy, a panel of key economic ministers, academics and business executives that maps out the government’s long-term strategy on fiscal and monetary policy.
Takahashi was among those advocating Prime Minister Shinzo Abe’s approach of prioritizing steps to boost growth rather than spending cuts, conflicting with the Finance Ministry, which traditionally drafts strategies focused on spending caps and tax hikes.
Still, Takahashi agrees that Japan must make some progress in enacting fiscal reforms while the Bank of Japan can buy it time by keeping borrowing costs low with its ultra-loose monetary policy.
“We enjoy a bonus from low interest rates now. But that will change when Japan emerges from deflation,” he said.
“Once you lose market trust (over the handling of finances), it’s hard to gain it back and could suffer from a jump in interest rates.”
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