Japan Aff Michigan
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Tax KT EconomyAbsent consumption tax increases Japanese economic collapse is inevitable The Economist, 4/10 (4/10/10, “Crisis in Slow Motion; Japan’s Debt-Ridden Economy”, http://www.lexisnexis.com.proxy.lib.umich.edu/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T9621498533&format=GNBFI&sort=BOOLEAN&startDocNo=1&resultsUrlKey=29_T9621498537&cisb=22_T9621498536&treeMax=true&treeWidth=0&csi=7955&docNo=6) Paradoxically, however, the belief that there is no imminent crisis brewing may be Japan's biggest problem. Without it, there may be nothing to force Japan's policymakers out of a deep paralysis. The scale of the institutional lethargy in Japan is at times breathtaking. Everyone, it seems, puts the blame for deflation and rising debt elsewhere. Take deflation, for instance. By any reckoning it has had a corrosive effect on consumption, debt and investment in the past decade. And expectations of further deflation are entrenched: more than 35% of people expect prices to be flat or lower in five years' time. The finance ministry, led by Naoto Kan, a newish finance minister, argues with increasing stridency that it is necessary for the BoJ to root out deflation, so that Japan can once again resume nominal GDP growth. Yukio Hatoyama, the prime minister, has collared Masaaki Shirakawa, the BoJ's governor, on the issue. Yet because the annual decline in consumer prices has been only moderate— they have never fallen by more than 1.4%, in contrast with the rapidly plunging prices of America's Depression in the 1930s—the central bank tends to view deflation as insidious, rather than cataclysmic. As one insider rather nonchalantly puts it, it is a symptom of bigger underlying problems, rather than the problem itself. The bank thinks the real problems are low productivity growth in Japan, which keeps wages low and suppresses demand for goods and services, and high public debt. In that sense, bizarrely for a central bank, it does not appear to believe that deflation is a monetary problem. Its own earlier experience of monetary stimulus since 1995, when it more than doubled the monetary base with little discernible effect on nominal growth, has left it unimpressed. As a result, it injected liquidity only half-heartedly into the system during the global financial crisis, putting it at odds with central banks in other rich countries. The BoJ's resistance to acting more forcefully may be rooted in its own analysis of its earlier experience. It also seems to be haunted by the potential consequences for its credibility if it acts and fails. That position might be understandable if it were a clearly stated policy. But the bank seems to want it both ways. After much government pressure, in March it said it would extend its emergency supply of three-month loans to the banking system by {Yen}10 trillion. But far from being seen as a principled move to jump-start lending, this was perceived as a weak attempt by the bank to get the government off its back—and the BoJ's credibility took a further knock. When it comes to public debt, the finance ministry's ostrich-like argument that there is little it can do about it until the BoJ deals with deflation is just as frustrating. It, too, appears to think that things are not as bad as the outside world believes. As one central banker ruefully puts it: "Japan is not faced with an imminent debt crisis. But that is a mixed blessing." The torpor dates back years. The finance ministry is haunted by its premature attempt to raise consumption taxes before a recovery was fully under way in 1997. Another attempt to overhaul spending and taxation was launched in 2006, not long before the bursting of the global credit bubble brought it to a halt. According to the OECD, under previous LDP governments, much of the emphasis on improving public finances was focused on spending cuts rather than tax increases. Taxation as a share of GDP remains among the lowest in the OECD. But the tax system is hardly conducive to growth, with some of the highest corporate-tax rates and lowest consumption-tax rates in the rich world. To bureaucrats in the finance ministry, this suggests there is plenty of fiscal flexibility in Japan to deal with the debt problem. The trouble is they have never succeeded at tax reform. Into this policy vacuum came the new DPJ government last year, with Mr Hatoyama vowing that he would not consider raising the consumption tax until the next elections in 2013. Greece's fiscal mess may have knocked a greater sense of urgency into his administration. After his first G7 meeting in February, Mr Kan, the newly appointed finance minister, began to speak more publicly of fiscal reform. Others have taken up his call. Yoshito Sengoku, Mr Kan's replacement as strategy minister, says that the moment borrowing exceeded tax revenues in the 2010 budget, it was clear that Japan had reached a turning point. "I don't think the situation will go immediately as it did in Greece. But going forward the Japanese bond market will always be under pressure and the government officials who are in charge of fiscal policies have to be ten times more cautious than before," he says. He favours an increase in the consumption tax and may also support cuts in corporate tax when he announces a medium-term plan for fiscal reform in the spring. But the politics of a significant overhaul are excruciatingly complicated. After a series of political-funding scandals involving Mr Hatoyama, support for his administration has fallen sharply ahead of upper- house elections in the summer. So it is a safe bet that any talk of tax reform will be accompanied by soothing promises of higher welfare spending. At present none of the ideas being aired to deal with Japan's problems is anything like bold or concrete enough to sound convincing. And though the government may muddle through for a few years yet, ultimately the situation is unsustainable. At some point, unless radical steps are taken, Japan's government will go bust. The IMF's Mr Tokuoka reckons that as the population ages, savings will dwindle, which could reduce inflows to the government-bond market. He calculates that even if the household savings rate remains at 2.2%, by 2015 gross public debt could exceed households' financial assets, which might make domestic funding more difficult and lead Japan to rely more on foreigners. Meanwhile, government pension funds have more flexibility to invest in other assets besides government bonds. With interest payments at 26% of tax revenues, rising yields would come as a huge shock to Japan. Already, some economists argue that flat bond yields give only the illusion of market stability. Ryutaro Kono, chief economist of BNP Paribas in Japan, says that given the fall in Japan's potential growth rate and the drop in inflation expectations, yields should normally have plunged. "The fact that the long-term rate has generally been flat for the last 18 months suggests the risk premium is rising on questions of the sustainability of Japan's public debt," he says. What's more, rising social-security payments as the population ages are likely to put even more pressure on public financing, while the shrinking workforce will mean even slower growth and smaller tax revenues. In 1990 almost six people of working age supported each retiree. By 2025 the Japanese government expects that ratio to fall to two. At some point Japan may have no other option than a domestic default in which the older generation, who hold most of the government bonds, will see the value of their investments cut to reduce the pressure on the younger generation. Such an intergenerational transfer would come at enormous political and social cost, not least in a society with such a strong sense of communal well-being. Directory: files files -> Answer True False 2 points Question 2 files -> Integer programming and game theory files -> 4 Integer Programming files -> Bpa vehicle Window Repair Scenario #1 task: Procure vehicle window relacement. 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