lessons from the european sovereign debt crisis to …..."lessons from the european sovereign...

"Lessons from the EuropeanSovereign Debt Crisis to Japan"Sovereign Debt Crisis to Japan"

Takatoshi ITOUniversity of Tokyo

Presentation in Ossesrvatorio Asia, Rome, ItalyFebruary 29, 2012

Outline

• Introduction

• European Debt Crisis

• Japanese Debt Crisis (in future?)

• Demographic problem• Demographic problem

• Puzzle. Why is the interest rate so low?

• Japan’s fiscal consolidation efforts

• Italy and Japan: common challenges

2012/2/29 2(c) Takatoshi Ito

Introduction

• Italy and Japan, similarities and differences– Similarity: High debt-GDP ratio

• Fiscal deficits and debt-to-GDP ratio

• Japan is now much worse now

– Similarity: Demographic Problem– Similarity: Demographic Problem• Low fertility

• Demographic deficits

– Difference: Exchange Rate• Italy in the Euro Area

• Japan independent float


Gross Government Debt-GDP ratio Japan

used to be respectable, not anymore. Japan is muchworse than Italy now

150

200

CAN: Canada

DEU: Germany

FRA: France

GBR: UnitedKingdomITA: Italy

JPN: Japan

USA: United States

Japan

Italy


0

50

100

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

United KingdomUSA

CanadaFrance

Germany

Net Debt-GDP ratioSimilarly, in the “Net” measure

90

110

130

CAN: Canada

DEU:GermanyFRA: France

GBR: UnitedKingdomITA: Italy

JPN: Japan

Japan

Italy

Canada

2012/2/29 (c) Takatoshi Ito 5

-10

10

30

50

70

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

United Kingdom

USA

Canada

France

Germany

-4

-2

0

2

4

6

8

(Percent of GDP)

Italy

Canada

France

General Government primary surplus (G7)A key indicator for sustainability. Italy is not bad at all

-12

-10

-8

-6

-4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Source: International Monetary Fund, World Economic Outlook Database, September 2011.

JapanGermany

United Kingdom

United States


European Debt Crisis

• Started with the Greek crisis– Critical points of time: October 2009; May 2010; May 2011; July

2011; and December 2011– Why couldn’t Greece, EU and IMF solve the crisis quickly?

• Crisis spread to Ireland, Portugal, Spain, and Italy– But very different fundamentals among the Five– But very different fundamentals among the Five

• Italy has primary surpluses; Spain has low debt-to-GDP ratio

– Why couldn’t EU, IMF & ECB prevent contagion?

• Classic view: Can we separate the fundamental crisis andcontagion? Let the former default if debt overhang is toomuch; and assist the latter with Lender of last resort– In sum, ring fence Greece, when Greek debts go default– Why has this not been applied in Europe?


-5

0

5

10

(Percent of GDP)

ItalyIceland

GreecePortugalSpain

Projection

General Government, primary surplus (EuroArea countries with large debts)

-30

-25

-20

-15

-10

2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: International Monetary Fund, World Economic Outlook Database, September 2011.

Ireland

Spain


Japan

• Trend of the government finance: 1990s and 2000s– Expenditures continue to rise– Tax revenues fell in the 1990s and 2000s

• Income tax and corporate income tax fell• VAT (consumption tax) stable

• Last three years:• Last three years:– 40% of Expenditure is financed by new bond issues– New bond issues exceeds tax revenues– Not sustainable as is Needs fiscal consolidation

• Current government plan– VAT 5% 8% in April 2014;– and 8% 10% in October 2015– A step in the right direction


Revenue and expenditure

46.850.8

54.9 54.1

49.447.2

50.747.9

45.6 44.349.1 49.151.0

60.159.8

54.451.0

51.953.952.1

81.484.9

89.0

84.4

78.578.875.9

73.675.1

70.570.569.3

65.961.5

57.753.653.051.550.6

47.246.9

82.483.7 81.8

85.584.889.3

84.7

92.3

101.0

52.060

80

100

120（Trillion yen）

Total Expenditures

1.0

23.7

29.0

38.241.9

46.8 47.2 47.945.6

5.37.2 7.2 6.7

9.5

18.5

34.037.5

31.3

44.344.3

38.737.4

15.713.8

17.3

43.8 43.3

32.430.5

34.9

21.9

26.9

47.246.943.4

38.8

34.1

29.124.5

20.9

7.3

35.035.335.5

27.525.4

33.2

9.6

13.514.212.9

14.013.5

12.812.39.411.3

6.6

21.2 21.7

30.033.0

10.7

16.2 16.5

(20)

0

20

40

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

（FY）Total Expenditures

（Note ） FY1975-2009: Settlement,FY2010: Initial budget

Tax Revenues

Government Bond Issues


Tax Revenues by category, VAT is a best bet

Individual income tax

16.817.4

18.0

21.4

26.026.7

23.223.7

20.419.5

19.019.2

17.0

18.817.8

18.4

20.0

25.0

30.0

（trillion yen） Various TaxesIncome

Corporate

Excise

Consumption


Corporateincometax

Consumptiontax

Excise Tax5.5

6.2 6.6

7.8

9.3

10.8

12.012.8

13.614.1

15.4

16.817.4 17.0

15.4

14.813.9

14.715.6

14.1

16.1

15.0

12.912.6

4.14.8

5.6

7.97.4

8.9 8.8 9.19.8

11.312.0

13.1

15.8

18.419.0

18.4

16.6

13.7

12.1

12.4

13.714.5

13.5

11.410.8

11.7

10.3

9.5

10.1

11.4

13.3

14.9

14.7

10.0

6.4 6.0

0.8 0.8 0.9 1.1 1.2 1.2 1.3 1.4 1.4 1.6 1.6 1.7 2.0 2.2

3.3

4.6 5.0 5.2 5.6 5.6 5.8 6.1

9.310.110.4

9.8 9.8

9.8

9.7 10.010.610.510.310.0 9.8 9.6

0.0

5.0

10.0

15.0

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

(年度)

Demography

• Demography matters– Pension system sustainability– Growth potential is adversely affected

• Contents of government expenditure changes– More medical; More pension

• How to affect debt dynamics• How to affect debt dynamics– Social security payments increase– Effective kind of taxes change

• Intergeneration transfer becomes a key– Pay-as-you-go pension systems are quite unfair to younger

generation– If relied on income tax, the baby boomer will escape taxation for

sustainability Unfair to the younger generation


2010

MaleMale Female

Baby boomer generation isabout to retire


Population, 10,000

No third baby boomSecond Baby boomer generation,

sons and daughters of the first

Demographic deficits

• Both Japan and Italy faces

– a sharp decline in the working age populationratio

– A sharp increase in the retired population ratio– A sharp increase in the retired population ratio

• Japan will also faces the rapid decline in totalpopulation


Total population; Italy and Japan

100000

130000

Total

ITALY

JPN


40000

70000

1950196019701980199020002010202020302040205020602070208020902100

30.0%

40.0%

50.0%

60.0%

Working age population ratio:age 20-59 / total population

Italy

Japan


0.0%

10.0%

20.0%

30.0%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat,World Population Prospects: The 2010 Revision

25.0%

30.0%

35.0%

40.0%

45.0%

Retired population ratio:Ages 60 and over/Total population

Japan

Italy


0.0%

5.0%

10.0%

15.0%

20.0%

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 2100

Source: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat,World Population Prospects: The 2010 Revision

How to restore fiscal sustainability

• Europe– Positive Element of the Euro Zone

• Bond rate convergence (until October 2009)• Discipline by the Euro Area, the “troika”

– Negative Element• Cannot depreciate the currency, difficult to restore growth• Cannot depreciate the currency, difficult to restore growth• Discipline by the Euro Area, or the “troika”

• Japan– Long-time complacency motivated by

• Low JGB interest rate• Room of maneuver

– Taxes have to be increased, quickly• Intergenerational inequity, getting worse• Not much room for expenditure cut, except social security

expenditure cut


Japanese Debt Crisis (to come)

• Very bad situation (worse than Italy and Spain)– Deficit/GDP ratio

– Debt-to-GDP ratio,

• Puzzle: Then, why no crisis yet? (JGB yield < 1%)Puzzle: Then, why no crisis yet? (JGB yield < 1%)– Japanese residents hold 95% of JGBs

– Japan has current account surpluses (although tradeaccount turns negative recently)

– Vast room for tax increases

• The sooner the better– Demographic change is very adverse


Puzzle, Debt and interest rate

5

6

7

8

400

500

600

700

JGBdebt JGBrateTrillion yen %


0

1

2

3

4

0

100

200

300

400

A solution by Tax increase in Japan

• Increase VAT (consumption tax) rate from 5%to 25% will solve government deficit problem– New Bond issues: 44 trillion yen

– 20% point increase in VAT will generate 45-50trillion yen

– 20% point increase in VAT will generate 45-50trillion yen

• Personal income tax increase will miss babyboomer generation to be taxed.

• Corporate income tax increase will hastenhollowing out—bad for growth


Italy and Japan, common challengesfiscal crisis

• What did Italy learn from the EuropeanSovereign debt crisis?– Is it just a bad spillover from Greece?

• Italy got hit despite its primary budget surpluses

– Does it need “discipline” from outside?• Why it took so long and so much for Italy to convince

investors that Italy is sustainable (assuming it is).

– Can the “technocrats government” do a better jobthan politicians?

• Why do politicians fail to make right decisions?


Italy and Japan, common challengesfiscal crisis

• What can (should) Japan learn from the currentEuropean crisis?– When a crisis happens, it gets worse quickly

– What takes to calm the market once the crisis occursrequires much more austerity than restoringrequires much more austerity than restoringsustainable path during the non-crisis time

– Hence, it is much more desirable to adopt austeritywhile the sovereign bond market is calm

– Once the crisis occurs, political disputes (politicking) isvery costly. Grand coalition or a technocratgovernment with broad mandate is the best


Italy and Japan, common challengesGrowth Policy

• Growth policy. Growth is better than austerity.– Where are growth engines?

• Japan: agriculture, bio-medical-health care, education?

• Italy: What is a consensus among Italians?

– Take advantage of “globalization”: Skill premium– Take advantage of “globalization”: Skill premium

– EU-Japan FTA will be a key for growth in botheconomies

• Low fertility rate– Japan, Korea, Hong Kong, Singapore and Italy?

– Will immigration be an answer?


lessons from the european sovereign debt crisis to …..."lessons from the european sovereign...

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