Japan’s newly minted finance minister, Naoto Kan, seems an excellent choice to lead Japan on an expedited road to fiscal perdition. For those who argue the best way to deal with the coming financial crisis is to precipitate it quickly, Mr. Kan’s choice should be particularly welcome.
The governments of the industrialized world are almost uniformly embarking on a crash course in sovereign debt calamity. In raw dollar terms, the United States is leading with a budget deficit in 2009 of $1.4 trillion and even more expected for 2010 and thereafter. But for fiscal chutzpah, the Japanese are the clear leader, with a debt-to-GDP ratio over 200 percent and climbing fast.
Finance Minister Kan appears likely to extend Japan’s lead. A political operative with “little, if any experience in fiscal affairs or macroeconomic issues” according to the Financial Times, he is more prone to worry about fiscal stimulus than fiscal restraint.
Many governments of the industrialized world are playing a game of deficit spending chicken, hoping credit markets will continue to underwrite their folly. Japan has been cut some slack because of its prodigious domestic saving, but that slack will soon be taken up and then some by all the government debt.
But Greece has already been put on notice by its creditors. The U.K. appears completely at sea under its lamest of ducks, Prime Minister Gordon Brown. And the United States government operates as though stern words about fiscal discipline can substitute indefinitely for spending restraint. Memo to Washington: the markets are not fooled for long.
For proof, look at Tokyo. The Nikkei closed 2009 near 10,500. It closed 1989 near 39,000. And Japanese investors have it exactly right. Japan’s world-beating debt-to-GDP ratio has yielded an economy which was about the same size in 2009 as it was in 1993. Japan took a two-year sharp and painful recession and, through the miracle of deficit spending, turned a short, sharp recession into a two-decade absolute calamity. Now the rest of the world seems to want to follow suit.
It is especially astounding that the world should be coming out of a near cataclysmic financial disaster predicated on the deadly mixture of bad public policies and private debt, only to charge full speed toward yet another disastrous mix of bad public policies and bad public debt. There is still time to shift course. But the appointment of Mr. Kan is not an omen for hope.
Co-authored by J.D. Foster.
