STAFF NEWS & ANALYSIS
Japan Shocked by Goverment Borrowing
By Staff News & Analysis - December 28, 2009

Yukio Hatoyama (pictured left), the new Japanese Prime Minister, has stunned a nation already mired in huge public debt by unveiling the country's biggest ever postwar budget: a 92.3 trillion yen (£630 billion) spending spree aimed at "saving people's lives". The unprecedented budget, which supposedly shifts Japan's fiscal spending focus "from concrete to lives", comes amid rising concern about the solidity of sovereign debt in the world's second-largest economy. The new budget will require additional debt issuance of Y44.3 trillion – within the Government's expected band, but still at a level that will raise Japan's debt-to-GDP ratio to nearly 195 per cent. Of foremost concern, analysts for Nomura said, is that Japanese tax revenues are expected to fall to Y37.40 trillion this year, the lowest that they have been since 1984. It was, analysts said, a watershed moment – the first time that new debt issuance has exceeded tax revenues since the Second World War. Mr. Hatoyama said: "We were just able to stay at a level in which we can maintain fiscal discipline." Mr. Hatoyama swept to power in August with grand promises that the era of wasteful public spending would end. Japan's unnecessary and notoriously expensive "roads to nowhere" public works projects would be curtailed and the money diverted to supporting beleaguered households. – Times Online

Dominant Social Theme: Another great country turns full-bore to debt.

Free-Market Analysis: This article is interesting because of the parallels to the situation in the United States. Barack Obama swept to power by guaranteeing "change you can believe in" – but his change proved of the socialist kind, as he harried Congress to spend trillions re-inflate both the bubble and the welfare state. Now almost exactly the same thing is seemingly taking place in Japan.

These are big economies in trouble, as are many economies in the EU. What has happened is that the currency itself has all-but-evaporated. The powers-that-be simply will not admit it, but the fiat money standard of the past 40 years is dying and we are entering a new phase. Now we don't know what the new currency will look like, and we don't know how long it will take get there, but the old dollar-denominated central banking currency of the past decades is virtually terminal. Here's some more from the article:

The Government hopes that the budget's inclusion of steps such as allowances for families raising children and free public high school education will boost its popularity before an Upper House election next summer. That election is critical for Mr. Hatoyama and the DPJ. Only by winning an outright majority in the Upper House can the new Prime Minister be free of the various coalitions that have hampered his first months in power. "I believe that we have delivered all we can without compromising fiscal discipline," Mr. Hatoyama said. "Our country's economic and employment conditions are very severe. The most important thing for us is to protect the lives of the Japanese citizens." The budget plan will contain Y53.4 trillion in policy spending; 51 per cent of that will go to social security programmes. This is the first time that social security has received more than half of policy spending, reflecting the new Government's focus on jump-starting consumption rather than the big public works projects carried out by former administrations. Tax revenues are expected to make up less than half the Government's 2010-11 budget, falling behind new debt borrowing for the first time since the Second World War after a deep recession that devastated company profits.

We can see in the above elaboration that the policies being followed are very similar to those in the United States. And they will work no better, in our opinion. Japan is even more sclerotic than America when it comes to private enterprise. The same big families that produced Japan's military equipment during World War II are now producing its cars. The private (entrepreneurial) sector, which must inevitably drive any modern economy, is being screwed into the ground in both Japan and the United States.

NOTED: "Central Problem: the Central Bank … Federal Reserve's easy-money madness must end … President Barack Obama heads the list of Americans who believe that the continuing financial crisis should be blamed on excessive risk-taking by bankers who had an unbridled desire to make money in mortgages. These would-be reformers want stronger government regulation of the bankers to make sure that nothing like this ever happens again. In a recent 60 Minutes interview, Obama blamed "fat cat bankers" for causing the crisis, putting America through its "worst economic year…in decades." He went on to chide Wall Street banks for "fighting tooth and nail" the new regulations he believes would be vital in preventing future crises. A deeper examination, however, reveals that this is neither a housing crisis nor a Wall Street banking crisis. This is a monetary crisis, rooted in the lending of money created out of thin air. This is what leads to economic booms and busts." By Robert Klein and George Reisman. – Barrons Online (Tip of the hat to our friend George R. for forwarding this excellent analysis to us.)

After Thoughts

We are fairly incredulous about the how closely the Japanese economic solution is paralleling the American one. Just a coincidence? It is almost as if those running these economies are hoping for a collapse. You can't simply print money and direct it at dying businesses and the over-banked financial sector. All you do is crowd out new, vibrant business and confuse funding streams. The result is that you take a sharp contraction and turn it into prolonged financial agony. And isn't this the continued playbook for the Western world? Say, what would happen if the US and Japan go bankrupt (and they are headed that way now). Would regional solutions be suggested? Would regional currency mergers float to the fore? Would these be coincidence too?

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