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Japan Exempted from G20 Agreement on Deficit Reduction [ 2010.08.26 ]

[NewsJapan.net] Leaders of the world’s 20 wealthiest and emerging economies met in Toronto on June 26–27 and agreed to at least halve the deficits of leading industrialized countries by 2013 and to stabilize or reduce government debt-to-GDP (gross domestic product) ratios by 2016. Japan was exempted from the agreement because of its tight fiscal situation and also on the ground that its debt is almost entirely financed domestically. At the G20 summit, Prime Minister Naoto Kan explained his government’s policy of pursuing economic growth and fiscal reconstruction in tandem. At a press conference following the summit, he noted that Japan’s policy had been welcomed by the other countries (The Nikkei, June 29).

According to media reports, at the summit there was an apparent difference of opinion between the United States, which stressed the importance of buoying up the still fragile economy, and European countries, which stressed fiscal consolidation as the top priority in economic management for the time being. US President Barack Obama stressed the importance of continuous stimulus to prevent the fledgling recovery from derailing and warned his European counterparts against a premature attempt to reduce deficits by heavy spending cuts.

In the end, the summit’s declaration reconciled these two views. On the one hand it said, “There is a risk that synchronized fiscal adjustment across several major economies could adversely impact the recovery,” and on the other it said, “There is also a risk that failure to implement consolidation where necessary would undermine confidence and hamper growth.” The declaration called on each country to aim for deficit reduction “differentiated according to national circumstances” and exempted Japan from the agreement, saying, “Recognizing the circumstances of Japan, we welcome the Japanese government’s fiscal consolidation plan announced recently with their growth strategy.”

The central theme of the new administration of Prime Minister Kan is to achieve the two goals of economic growth and fiscal reconstruction simultaneously. In its new growth strategy, decided on June 18, the government looks forward to an average annual economic growth rate of more than 2% in real terms and 3% in nominal terms in the years through fiscal 2020. In its fiscal management policy, the government aims to halve the ratio of “primary balance” deficit to GDP by fiscal 2015 and put the balance into the black in fiscal 2020. The primary balance is an indicator of the proportion of financing general expenditures (that is, excluding debt servicing costs) by tax revenues without depending on debt. To achieve this, three rules have been set out: (1) the general expenditure budget will be restricted to 71 trillion yen in fiscal 2011–13; (2) new bond issues for fiscal 2011 will be held down to 44 trillion yen; and (3) new policies will be funded either by spending cuts or tax increases (The Nikkei, June 23).

The Kan government endeavors to achieve the two goals of economic growth and fiscal reconstruction without sacrificing either, and that was what Prime Minister Kan expounded at the Toronto summit. On June 27, at the press conference in Toronto after the summit meeting, he said, “The final G20 summit declaration indicates a path forward for fiscal reconstruction. In the declaration, Japan’s new growth strategy and fiscal management strategy were accepted in a positive manner and welcomed by the other leaders.”

At the G20 summit the issue of the Chinese currency rate was not discussed explicitly, as just before the Toronto summit the Chinese authorities preemptively decided and announced a measure to increase the flexibility of the renminbi’s movement. The issue was taken up in bilateral talks between US President Obama and Chinese President Hu Jintao in Toronto, but the US side did not press China for greater currency flexibility. Since the system for greater currency flexibility was put into practice on Monday, June 21, the appreciation of the renminbi had been quite modest. President Obama merely expressed his expectation that the Chinese currency would rise to a level commensurate with the size of China’s trade surplus over time. There have been few noteworthy remarks on the issue from Japanese officials or industrialists.

Editorials of Major Newspapers

In its June 30 editorial the Yomiuri Shimbun said, “Prime Minister Naoto Kan explained Japan’s new economic growth and fiscal management strategies, which were worked out shortly before the summit meeting, effectively making the strategies international pledges. This means that Japan will have to simultaneously pursue two goals---playing a leading role in the world economy by achieving sustainable growth and realizing fiscal reconstruction---that will be recognized by the market.”

In its June 29 editorial The Nikkei argued, “Japan’s fiscal management strategy, which was recently mapped out by the Kan administration, was welcomed [by the G20] as Japan is in a tight fiscal situation. . . . That Japan was treated as an exception was nothing Japan can be proud of. The government needs to tackle the issue and produce tangible results so that the nation will not lose the confidence of the markets.”

In its June 30 editorial the Mainichi Shimbun commented, “Japan was given special treatment by being exempted from the G20 summit agreement in view of its exceptionally bad fiscal situation. . . . Fortunately, Japan’s government bond interest rates have become even lower, so there is no sense of urgency. There is, however, no guarantee that this trend will continue. One of the reasons for the lower interest rates is that unlike European countries, where the value-added tax is over 20%, Japan has some room for tax increases to improve its fiscal situation.” The Mainichi noted, “Even if there is some room, though, interest rates could rise rapidly if credit-rating firms and the market think that a tax increase would be politically difficult. In terms of both improving its fiscal situation and playing a leading role in the international arena, it would be a great loss for Japan to be seen as a country that is unable to implement politically difficult measures.”

In its June 30 editorial the Asahi Shimbun argued, “Trial calculations indicate that revenues generated by a 9-percent consumption tax rate would be required for Japan to halve its annual fiscal deficit of more than 40 trillion yen ($451 billion) by 2013. This is premised on no increase in budgetary spending. Opting for such a sudden tax hike program under deflation is hardly realistic. For that reason, Japan must rapidly resolve its deflated economy and move forward with genuine fiscal consolidation.”

Referring to Japan’s exemption from the common goal, the Sankei Shimbun editorial on June 30 pointed out, “The government should face this reality and try to reconstruct its fiscal situation with a stronger sense of crisis. The question is to what extent Prime Minister Kan feels a sense of crisis over the exemption granted this time. . . . The G20 summit started as a joint effort of the advanced and newly developed countries to rebuild the world economy from the US-generated financial crisis in the autumn of 2008. If Japan cannot satisfy the ‘standards of a leading industrialized country,’ it cannot demonstrate its presence in the international community. We question how serious Prime Minister Kan is.”

(Copyright 2010 Foreign Press Center, Japan)

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