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What Abe Really Means for Japan

Stimulus plus tax hikes are the opposite of the magic economic formula for growth...
The ADMINISTRATION of Shinzo Abe in Japan just approved a rise in the consumption tax (national sales tax) to 8% in April 2014, up from 5%, writes Nathan Lewis at New World Economics.
This opens the door for another rise to 10% in 2015. At the same time, the Abe administration plans to spend ¥5 trillion on "stimulus" to offset the negative economic effects of the tax.
I've described a typical path of decline as a combination of "stimulus" and "austerity". The "stimulus" mostly means spending money, or some kind of "easy money" policy. The "austerity" is some kind of tax hike. Put together, they add up to higher taxes, a moribund economy, more demands on the government as the private sector stumbles, more reliance by the government on distributing money as a way of bolstering political support, worsening finances, more waste, and a depreciating currency.
This is completely contrary to the Magic Formula of Low Taxes, Stable Money – the formula that Japan itself used to grow wealthy during the 1950s and 1960s, and indeed in the 1870-1914 period as well.
Usually, a government bounces back and forth from one pole to the other, with at least a few months or weeks between "stimulus" and "austerity". This has been happening in Europe recently, and has been happening in Japan for years.
But, rarely do you get to see both "stimulus" and "austerity" in the same sentence! Successive Japanese governments have apparently become rather adept at this.
Most of the focus on "Abe-nomics" has been on the very aggressive monetary expansion being conducted by the Bank of Japan. To some degree this is warranted: the average yen exchange value over the past twenty years is about 120/Dollar. However, once that point is reached...what then? I suspect that, soon, it will degenerate into not much more than a way of financing the flood of JGBs that still pours forth.
I think most people understand now that the "stimulus" spending isn't really about Keynesian notions anymore. Rather, it has devolved into the simple purchasing of political support. Perhaps it was never really more than that, but any other justifications have worn too thin to be credible.
There's nothing new about this. In the sixteenth century, Spain was Europe's greatest empire. Over time, successive Spanish governments applied much the same policy of higher taxes, higher spending, and successive currency devaluations, mostly because they wanted to print money to fund the government (much the case as in Japan today).
The spending was deemed necessary to preserve political support. When even that didn't work, they spent more on the military to suppress revolt and revolution. As the private sector economy crumbled under ever-higher taxes, and successive currency devaluations, the king was not so popular anymore. His ministers feared that cutting off payments to nobles and other cronies might erode their base so much that the dynasty could crumble.
Of course, this required money, which meant higher taxes, more currency printing, a crumbling economy, and a very unpopular king. And so it went on, for generations, as Spain's once-grand global empire crumbled to dust. Even Portugal eventually said goodbye in 1640, unwilling to put up with the idiots in Madrid any longer.
This process could be short-circuited in Japan if the opposition parties could propose an alternative, and actually act upon it. However, Japan's main opposition party, the Democratic Party of Japan, is a lot like the US Democratic Party. Its roots are socialist in nature, focused on welfare programs, environmental issues, and so forth. It is as intrinsically adverse to a small government/lower spending/lower tax plan as is Hillary Clinton.
Even so, the present policy of more spending and higher taxes is so unpopular that the DPJ does make some sounds along these lines from time to time. They rarely amount to much, generally because of the influence of the Ministry of Finance, which has been dreaming of making Japan into an eastern version of France for forty years. The DPJ, which doesn't really have much conviction for conservative-type solutions anyway, is easily derailed by MOF's bureaucrats and their dirigiste fantasies.
How much is ¥5 trillion in "stimulus"? It is more than half the total annual revenue of the corporate income tax, including prefectural and local taxes (about ¥9 trillion), or the projected amount of revenue expected to be generated by the increase in consumption taxes (about ¥6 trillion) – which won't actually appear in any case.
What if, instead of "stimulating" the economy by throwing money down a hole to appease cronies, you reduced tax rates instead? It might be popular. But, they never think of that.
Nothing good is happening in Japan. Not much is likely to happen, until sometime after the present dingdongs reduce the economy to smoldering ruin.

Formerly a chief economist providing advice to institutional investors, Nathan Lewis now runs a private investing partnership in New York state. Published in the Financial Times, Asian Wall Street Journal, Huffington Post, Daily Yomiuri, The Daily Reckoning, Pravda, Forbes magazine, and by Dow Jones Newswires, he is also the author – with Addison Wiggin – of Gold: The Once and Future Money (John Wiley & Sons, 2007), as well as the essays and thoughts at New World Economics.

See the full archive of Nathan Lewis articles.

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