Besides supposed stagnation, the two other curses of the Japanese economy are debt and deflation. Yet these also partly reflect demography and can be overstated. People often think of Japan as an indebted country. In fact, it is the worlds biggest creditor nation, boasting 253 trillion in net foreign assets.
To be sure, its government is a large debtor; its net debt as a share of GDP is one of the highest in the OECD. However, the public debt has been accrued not primarily through wasteful spending or bridges to nowhere, but because of ageing, says the IMF. Social-security expenditure doubled as a share of GDP between 1990 and 2010 to pay rising pensions and health-care costs. Over the same period tax revenues have shrunk.
Falling tax revenues are a problem. The flip side, though, is that Japan has the lowest tax take of any country in the OECD, at just 17% of GDP. That gives it plenty of room to manoeuvre. Takatoshi Ito, an economist at the University of Tokyo, says increasing the consumption tax by 20 percentage points from its current 5%putting it at the level of a high-tax European countrywould raise 50 trillion and immediately wipe out Japans fiscal deficit.
That sounds draconian. But here again, demography plays a role. Officials say the elderly resist higher taxes or benefit cuts, and the young, who are in a minority, do not have the political power to push for what is in their long-term interest. David Weinstein, professor of Japanese economy at Columbia University in New York, says the elderly would rather give money to their children than pay it in taxes. Ultimately that may mean that benefits may shrink in the future. If you want benefits to grow in line with income, as they are now, you need a massive increase in taxes of about 10% of GDP, he says.
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