New Taxes coming soon

21 Jan

Despite the protests of the minority Liberal Democratic Party, Prime Minster Noda and his Democratic Party of Japan have plans to submit a bill to parliament to increase the current national consumption tax up from the current 5%. The existing plan calls for an increase to 8% in 2013 followed by the final goal of 10% by 2014.

His government’s position is that 2.7 trillion yen or 1% of the tax increase should be used to support the social welfare system and that 10.8 trillion yen or the other 4% should be used to stabilize the current social security system. This would in effect maintain government contributions to pensions at 50%. Hmm where is the money to reduce the debt coming from ? Oh wait that isn’t part of the program, my mistake.

To Mr Noda’s credit he is openly stating that Japan must reduce its debt to GDP ratio, which is currently above the 200% level. Mr Azumi the Finance Minister is on the record saying that the recent Euro crisis and adverse bond revaluations courtesy of the rating agencies will come home to roost in Japan. While the PM and his ministers should be applauded for telling the truth, this gaijin is left wondering how the situation got so putrid in the first place.

It isn’t hard to find the answers.

For starters the country was ruled under the iron fist of the LDP for 54 years. Without challenge for the better part of 5 decades the LDP was in charge. For better or worse the country prospered under its leadership. Japan exports surged under the relatively weak yen and the work ethic of the Japanese Zaibatsu. Zaibatsu roughly translates to Corporate Japan, however the Japanese model is more closely associated with the gilded age of US trusts than anything currently existing in the Western world in the 21st century. Economy of scale is critical for a country lacking the natural resources to support its industrial capacity, which is a perfectly logical conclusion to make.

As the years passed the LDP with its big spending programs of government pork barrel projects paved the archipelago in concrete, built airports, highways, river bottoms and port facilities. Japan is actually 7th in the world in cement production yet is the size of Montana. The politicians and their road contract buddies grafted err voted endless pavement contracts. In fact on a road near where I live the construction has never ceased for 8 years! When they reach the end of the road they start “improving” things back at the start. Its a jobs program pure and simple and in this regard I can appreciate its utility, however I am left wondering if the money couldn’t be better spent elsewhere.

This has to do with the way spending is conducted here. The national government decides the projects to be done and earmarks the money. If the various prefectures want the money they must spend it in the way the Parliament wants it done. Yet apparently only 20% of the approximate total money comes from Tokyo, with the individual states dipping into their own accounts to come up with the balance. This has resulted in a push back from the various governors who are left with no wiggle room and boom era spending programs of little or no benefits. In fact quite a few of the programs end up as a liability. I could go into details on this but I think the point is already made and there is no need to rub salt into the wound. This subject probably bears its own post so I will leave it be for now.

While the United States is currently experiencing the beginning retirements of its baby boomers, Japan has been undergoing this demographic challenge for some time now. So its no surprise to those of us who ascribe to Kondratieff cycle theory that its now clearly Winter time in East Asia. Its a well known fact that average personal spending peaks around age 48, and Japan has long since passed that magic number. No wonder the country is in a 20 year funk.

As mentioned in an earlier post the Japanese have many strong points however a glaring weakness is the ability to openly confront an issue. So the SOP spending programs continued as if nothing had changed. Meanwhile the country was slipping farther into debt, tax revenues were decreasing and entitlement programs were mushrooming. The LDP is clearly to blame for this absurd state of affairs. I am not sure what their excuse would be but perhaps the glamor of the Carousel of debt was too much to pass up. After all look how far the Japanese have come. Its been a miracle story of diligent hard work done by a people with barely any national resources except their brain power. With decades of 70 hour work weeks they fine tuned US production methods and built themselves an empire based on quality control, crunching numbers, savings and investing in their children. Even to this day Japanese engineers sit in offices for countless hours finding a multitude of working solutions to the EU’s growing green energy requirements. If I hadn’t partly experienced it for myself I wouldn’t have believed it.

Now however the sun is far from rising and is in fact setting, yet until recently it was full speed ahead and damn the torpedoes. Now the country is faced with a mountain of debt, an economy that is at best flat, a natural catastrophe, a lasting nuclear emergency and social entitlements that are only going to increase. Deck chairs on the Yamato indeed.

Not to paint with too dark a brush I want to stress that if any culture is able to get out of such a box it would be the Nihonjin. A lengthy history of struggle, overcoming long odds and ample capacity to sacrifice clearly indicates it somewhat foolish to believe that Japan cannot find a solution to what ails them. The medicine however is growing increasingly sour and denial isn’t helping the situation.

Much like what is transpiring in the EU and the USA, there is an increasing rift between the older folks with their comfortable lifestyle based upon consumption and the under 30s along with the have nots who want to re-arrange the apple cart. However that is NOT an issue for Japan. The young will simply accept their fate and the old will continue on as if little has changed. Perhaps they will tweak the margins but it won’t avoid the inevitable day of debt reckoning.

The difference is that here in Japan, the debt is owned by the Japanese people. I have little doubt that they will simply accept the necessary haircut required to balance the schedule of payments. A total default is in my humble opinion not part of the cards, but a partial one is in fact quite likely.

Mr Noda and Azumi are simply the messengers, however as I have already explained their popularity will quite likely be in the single digits by September and the Merry go round will wind up another round of music. Hopefully the tax increase which I believe is all but certain will drive the subject onto lips of the public.

Perhaps in the long run Mr Noda will go down as a leader of sound financial policy. Until then the LDP will obfuscate and interfere hoping to gain the reins of power themselves, so that they can in turn steer the ship of state onto the rocks that bear ever closer.

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