Bloomberg News

Japan Should Boost JGBs to Spur Growth, Sakakibara Says

July 04, 2012

Japan Should Forgo Tax, Use JGBs to Spur Growth, Sakakibara Says

Japanese Prime Minister Noda's bill, which passed the lower house of parliament last week, calls for increasing the 5 percent sales tax to 8 percent in April 2014 and to 10 percent in October 2015. Photographer: Tomohiro Ohsumi/Bloomberg

Far from tightening its fiscal belt, Japan should expand the world’s largest debt pile to rekindle economic growth, said Eisuke Sakakibara, a former Ministry of Finance official.

Prime Minister Yoshihiko Noda’s push to double the sales tax to lessen the government’s reliance on Japanese government bonds could further damage an economy already struggling amid a slowdown in exports, Sakakibara, known as “Mr. Yen” and now a professor at Aoyama Gakuin University in Tokyo, said in an interview yesterday.

“We should be selling large amounts of JGBs to fund an economic stimulus,” he said. “We could also consider a cut to the corporate tax rate as a stimulus step. The big problem for the Noda administration is there’s no one in an important office who understands the economy.”

Japan’s bond market is signaling no immediate concern about a public debt burden that’s now double the nation’s annual economic output. The benchmark 10-year note yield closed yesterday at two basis points from a nine-year low, and central bank data showed last month that overseas investors owned 8.3 percent of JGBs at the end of March, the most on record.

The government yesterday auctioned 2.1 trillion yen ($26 billion) of 10-year securities at an average yield of 0.836 percent, the lowest since June 2003, according to Ministry of Finance data. Japan’s interest rates are the lowest in the world after Switzerland’s, data compiled by Bloomberg show.

More Aggressive

Noda’s bill, which passed the lower house of parliament last week, calls for increasing the 5 percent tax to 8 percent in April 2014 and to 10 percent in October 2015. He has said that raising the levy is necessary to contain the country’s debt and welfare expense. The International Monetary Fund and the Organization for Economic Cooperation and Development have both urged Japan to be more aggressive in reforming its finances.

An aging population and two decades of low growth have left Japan with a debt pile projected to exceed 1 quadrillion yen next year, the biggest in the world.

Opponents to Noda’s tax bill argue that it goes against the platform used by the Democratic Party of Japan on its ascent to power in 2009, and say it may discourage consumption and fail to increase government revenue. Ichiro Ozawa, a former leader of the DPJ, and 56 other legislators from the party voted against the tax bill, and Ozawa has since announced he will leave the ruling bloc to form his own political group.

Weak Economy

Japan will eventually have to address the imbalance of government spending that is now more than double what it takes in from taxes, according to Sakakibara. Though with a weak economy, the prime minister should instead be debating the shape of social welfare spending along with its sources of revenue, he said.

“In the medium to longer term, we’ll have to raise the sales tax - in no more than five years,” Sakakibara said. “To the extent that leading with a tax increase doesn’t make sense, Ozawa’s stance is correct. It’s a question of timing.”

Sakakibara, 71, 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 as a record earthquake off the northeast coast and a worsening debt crisis in Europe spurred gains in the currency.

“We can’t count on a strong domestic recovery from last year’s disaster with overseas growth slowing this year,” Sakakibara said. “So it’s a mistake to conduct the tax hike at a time like this.”

To contact the reporters on this story: Shigeki Nozawa in Tokyo at snozawa1@bloomberg.net; Brian Fowler in Tokyo at bfowler4@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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