Japan reported this week that gross domestic product (GDP) contracted by 0.4%, or 1.6% on an annualized basis, during the second quarter.
Meanwhile, Japan is carrying out the most aggressive money printing program in the world right now, and its budget deficit is also the largest among the world’s rich countries. Oh, and its public debt is also the world’s highest in terms of GDP.
All of which suggests that something is seriously wrong in the Land of the Rising Sun. Indeed, it’s Japan’s – and not China’s – economic policies that are most likely to collapse in ruin.
When Prime Minister Shinzo Abe took office in 2012, he vowed to get the Japanese economy moving back toward the 2% annual growth rate that was thought to be its natural “speed limit.”
One of his first steps was to appoint a new governor for the Bank of Japan, Haruhiko Kuroda. Kuroda instituted a bond-buying program that, relative to the country’s economy, was about three times larger than Ben Bernanke’s “quantitative easing” at its peak.
Abe also promised a program of reforms, including an overhaul of the labor market. A few reforms have been implemented, and others – such as the partial privatization of the gigantic, government-owned Japan Post – are at least underway.
But the real problem is the third leg of Abe’s program, a series of fiscal “stimulus” spending initiatives that have given Japan the largest budget deficit in the rich world. For 2015, The Economist’s team of forecasters projects a deficit of 6.8% of GDP.
To reduce the deficit, Japan sought to increase its sales tax – but the first increase, from 5% to 8%, caused the economy to relapse into recession. The second hike, to 10%, has been postponed from 2015 to 2017.The United States, by comparison, runs a budget deficit equivalent to 2.6% of GDP. The figure is 4.4% in the United Kingdom and 2.7% in China.
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