Japan’s DPJ, LDP, and Komeito together on hiking the consumption tax to 10%.

Hiroko Tabuchi in the New York Times.

I am not certain how done a deal this is, but it looks very solid, because now the big news organizations are putting the story out. It sounds like the DPJ (Minshuto) agreed to table the 70,000 yen a month minimum, and a new program of health care for the 75-and-over seniors. The opposition parties agreed to let the consumption tax go up, which is nice of them because it was in the LDP (Jiminto) platform for years and years anyway.

The one thing I want to point out, though, is the talk about Japan’s gross debt being over 200% of the Japan gross domestic product (GDP). Yes, that’s true. What is almost always left out, though, is that Japan’s NET debt is something like 80% of GDP. Most of Japan’s debt is intergovernmental agencies borrowing and lending to each other. So this is not “debt” as we understand it. This is more like chits between departments. If the various departments agreed to settle up their chits, most of Japan’s debt would go away.

We have this going on in America, too—just not to the extent that it goes on in Japan.

The rest of Japan’s debt is owed to other Japanese nationals. So there never would be a debt crisis like in Greece. The majority could just tax away whatever amount that is owed to the bondholders, until the “crisis” went away. Greece can’t do that. Alternatively, the Bank of Japan could just run an inflation.

The real news about the 10% consumption tax is that now Japan is finally creating a dedicated system of revenue to cover the basic pension. As I was saying the other day, practically all the other advanced countries in the world have this, including the US with its payroll tax.

The people who say this will slow down the Japanese economy are wrong. If this money is turned around, and paid as social welfare benefits, it is simply the transfer of consumption from one set of consumers to another set.



  1. sigmafinancialenglish · June 18, 2012

    Thanks ! Really really appreciate your plain, easy to understand writing style. This is the only sentence I don’t fully understand.
    The majority could just tax away whatever amount that is owed to the bondholders, until the “crisis” went away.

    If you could explain this in another way I`d be really grateful.


    • hoofin · June 18, 2012

      When public debt is owed entirely within one country, the citizens who OWN the debt (the creditors) are also subject to the country’s taxes.

      If Japan were ever to undergo a debt crisis, it would simply be a matter of taxing the assets of those creditors at a higher rate, until the crisis went away. (You see, the only reason a crisis could develop is if the creditor class decided it was going to create one.)

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