New Government's Tax and Spending Policies Could Hurt Japan

Japan’s public finances may deteriorate if the incoming government implements its promised spending and tax policies, warns U.S. economist Carl Weinberg.

 

Speaking to Bloomberg, the chief economist at New York-based High Frequency Economics says the new ruling party, the Democratic Party of Japan, is likely to favour policies that could cause a surge in government borrowing and higher long-term bond yields.

 

Weinberg warns that “a catastrophic breakdown of Japan’s public-sector finances will be the biggest story ever to hit the world economy in our times, eclipsing the current financial crisis.”

 

According to Bloomberg, the incoming administration has said it will pay for its priorities partly through diverting as much as 5 trillion yen (US$54 billion) of stimulus spending already approved. But economists tell Bloomberg that it may be hard to fulfil the promises without aggravating a public debt already nearing 200% of gross domestic product.

 

Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo told Bloomberg that most of the pledged spending requires semi-permanent funding, but tax revenue is falling. “If the DPJ implements all the promises, it may end up increasing bond sales and eventually will need to raise the sales tax to finance them,” Muto says. 

 

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