MyVision
No.4

2014. 8

Fiscal Discipline in Japan:
An Urgent Issue
How should we maintain fiscal discipline in Japan? The experts interviewed for this issue of My
Vision suggest that it will be important for citizens to share a sense of crisis, and to delineate theoverall structure of the crisis that is manifesting itself. From the systemic perspective, they indicatethat it will be necessary to effect radical reforms of the taxation system, comprehensively push ahead
with decentralization initiatives, and control increases in social security expenditure as the nation’s
population ages.

C O NT E NT S
Expert Opinions

What must We Do to Maintain Fiscal
Discipline?
Lack of a sense of crisis
is the real crisis

Creating an overall pictureof the structure of the crisis

Junko Kato

Taro Miyamoto

Professor, Graduate School for Law and Politics,
The University of Tokyo

Professor, Faculty of Law, Chuo University

Make the status of public
ﬁnances visible throughdecentralization

Toshihiro Ihori

Professor, Graduate School of Economics,
The University of Tokyo

Bring together private sector
experts with a sense of mission

Kaoru Yosano
Former Minister of Finance

Ultimately, we will need measures
to address the low birth rate
Takeshi Erikawa
Chairman, Saitama Prefectural University,
Chairman, The Health Care Science InstituteExpert Opinions

What must We Do to Maintain Fiscal
Discipline?
Japanʼs ﬁscal situation is worsening signiﬁcantly as a result of factors including increasing social security expenditure as the nationʼs population ages.
In the absence of eﬀective mechanisms to maintain ﬁscal discipline, Japanʼs already grave outstanding debt
will only grow worse.
Why is Japan unable to maintain ﬁscal discipline? What should we do to enable us to do so?
In this issue of MyVision, we ask academics in the ﬁelds of Japanese political studies, public ﬁnance, and welfare
politics, a politician who has formerly held key Cabinet positions including a term as Minister of Finance, andthe Chairman of a university with vice-ministerial experience.

Interviewer: Manabu Shimasawa, NIRA Senior Researcher
Period of interview: May 2014

Lack of a sense of crisis is the real crisis

Junko Kato

Professor, Graduate School for Law and Politics,
The University of Tokyo
At the beginning of the 1990s, it appeared that Japan’ s publicfinances would take a turn for the better, but in fact the situation
has grown steadily worse since then. We tend to focus on
economic conditions, but the transformation of party politics overthe past 20 years also forms a background to this situation. With
the party split in the LDP in 1993 and subsequent coalition
politics, the Liberal Democratic Party’ s attitude towards fiscal
discipline became extremely lax in comparison to its long periodof one-party government. Its experience as the ruling party has
given the Democratic Party of Japan an awareness of theimportance of fiscal discipline, but the reascendant LDP has
continued to back away from the issue, and there has been noeffective competition between the parties urging a response to thenation’ s fiscal situation.
The idea that taxes should not be raised because the governmentis extravagant with finances is strongly rooted in Japan. This
blocking of the lines of supply might be effective in a country witha strong orientation towards small government, but it is untenable
in Japan, where government is small in comparison to the mature
welfare states of Europe, but large in comparison to the U.S. This
structural contradiction has produced the nation’ s fiscal crisis.
In a period of high growth, there would be some expectation of
return from increased taxes in the form of social services, but thisis difficult to expect today, in a low-growth period against abackground of fiscal deficit. In a situation of ongoing inability toeffect the tax increases which are necessary for the recovery offiscal discipline, the nation’ s low tax burden has reduced the
public’ s sensitivity with regard to sound fiscal management.
Public inattention to government expenditure has seen Japan’ s

fiscal status continue to deteriorate over a long period, and yet
today the sense of crisis among the public is growing weaker. Thisis a dangerous situation.
During the administrative and fiscal reforms conducted at the
beginning of the 1980s, the Ad Hoc Commission on
Administrative Reform under Mr. Toshio Doko was successful inensuring that the government and the public shared a sense ofcrisis. What is essential today is to give unwavering attention to
the larger economic and fiscal picture and to develop a sense ofcrisis, in the gevernment and among the public. This would
provide a starting point towards fiscal reconstruction. ■Professor Kato analyzes the formation of the ﬁscal foundations of thewelfare state of mature democracies. She has also analyzed the processof introduction of consumption tax in Japan with a focus on the relationship between politics and the bureaucracy.

Make the status of public ﬁnances visible
through decentralization
Toshihiro Ihori
Professor, Graduate School of Economics,
The University of Tokyo

There are a number of factors behind Japan’ s failure to display
fiscal discipline. To begin with, while the Ministry of Finance ispointing out that the nation’ s fiscal status is poor, the public puts
no stock in it, pointing to wasteful expenditure and hidden assets.
In other words, there is an asymmetry in terms of information
regarding public finances between the government and the public,
and between the ruling party and the opposition.
In addition, the outlook for the economic growth rate was
exaggerated, and it has taken time to reach a position of awarenessthat the decline in the growth rate since the 1990s is the actual
situation. We have been led by the unreal expectation that futureMy Vision No.4

growth would naturally result in increased income, andmomentum towards fiscal reconstruction has not developed.
Further, in Japan, there has been no pressure from the market
and overseas, and the public does not have a real awareness of thedeterioration in the nation’ s finances. With the Bank of Japan’ smonetary easing measures artificially controlling interest rates,
market discipline has not developed, and unlike the situation in theEU, which shares a common currency, we have not had pressure
from concerned countries to maintain fiscal discipline.
Against this background, the boldest move that we could maketowards a solution would be to comprehensively advancedecentralization. If we could visualize benefit and burden on aregional level, the public would be able to make choices
autonomously. In Canada, which was successful in the fiscal
reconstruction that it commenced in 1994, fiscal discipline ismaintained by a system in which the national government
provides the regions with fixed amounts, which form the scope
within which they are expected to oversee medical care andwelfare.
From the perspective of legally binding force, despite the factthat the Public Finance Act has applied constraints that urge fiscal
discipline, it has had little effect. The exemption of the ceiling of
the supplementary budget from the application of the Act has beena factor in weakening fiscal discipline. At the least, it will benecessary to apply legal constraints to the mechanism of
formulation of the supplementary budget, and set the hurdle forthe passage of draft legislation higher than it is for the initialbudget. ■Professor Ihori conducts theoretical research on government economic
activities that are essential to the market economy. He stresses that ﬁscal
reconstruction demands not merely increased taxes, but also control ofsocial security expenditure.

Bring together private sector experts
with a sense of mission
Kaoru Yosano

Former Minister of FinanceIn order to maintain fiscal discipline, it is necessary to cut yourcoat according to your cloth. Deciding on a level of expenditurethat suits your income and repaying loans, even over an extended
period, are fundamental aspects of this. However, the fiscal deficit
problem that we face today arises from the disease of population
decline, which is characteristic of advanced nations. We must
recognize that we are approaching a turning point for our society
and our culture. Attempting to resolve this issue by means of the
stopgap method of accepting immigrants would be a mistake.
There is an idea that if Japan can recover its international
competitiveness and sell its goods in the future, public finances
will improve, but this is nothing more than soft soap. The idea that
relaxation of regulations will make everything alright is also a
fantasy. Economic growth is important, but we should not believethat economic activity on the current scale can rebuild publicfinances. Such baseless optimism will only lead to tragedy.
We must steadily increase consumption tax to 10%. National
debt is already approaching 200% of GDP, and the day is coming
when interest rates will rise without our being able to absorb
government bonds domestically. The public must understand thatlike the sinking of the Titanic, if we are inattentive, the Japanese
economy will run aground and sink.

On the expenditure front, we must revise the idea that the
government will supply what is lacking. In the area of welfare
expenses, we should move towards making autonomy andself-reliance fundamental. Precisely now, what we must do is tobring together a group of private sector experts with a sense of
mission towards salvaging Japan’ s public finances, to discuss
radical reform of the taxation system, including consumption tax,
the streamlining of social security expenses with no exceptions,and the comprehensive reappraisal of the coordination of nationaland regional finances. ■Mr. Yosano is a former member of the House of Representatives. A consistent advocate of ﬁscal reconstruction, he played a central role in thecoordination of the Comprehensive Reform of Social Security and Tax. He
is known as one of the greatest experts on policy in Japanese politics.

Creating an overall picture of the structureof the crisis
Taro Miyamoto
Professor, Faculty of Law, Chuo University

Fiscal discipline has two meanings. One is that government
expenditure is appropriate to government revenue, maintaining anequilibrium between revenue and expenditure and ensuring thesustainability of public finance. The other is to provide the publicwith fundamental infrastructure to enable working generations towork and pay social insurance fees and tax, ensuring that tax
revenues are continuously obtained. This can also be termed“social sustainability,” and it is an important function demandedof government and administration.
The fact that these two meanings are understood by taxpayers isa significant part of the reason that fiscal discipline is maintainedin the Scandinavian nations. Because the tax burden is high,taxpayers feel that there must be a return in the form of tangible
systems and policies, and this awareness motivates them tomonitor public finances.
In Japan by contrast, precisely because the scale of publicfinances is small, public finance literacy (the ability to understandand make judgments regarding public finances) has not been
fostered among the public. As a result, budgeting to support thechild-raising and employment essential to the guarantee of social
sustainability is put on the backburner, while political influencepeddling that ignores fiscal discipline grows stronger.
There is an awareness of crisis in Japan, but the fact that theoverall structure of the crisis is not visible represents a problem.
What we have is a situation in which individual crises – theastronomically increasing debt, the low birth rate, the lack of
daycare centers, the inability of women to work – repeatedly comeinto view and fade from sight. Because of this, we are trapped by
the concept that realizing economic growth will balance publicfinances, which simply postpones the issue. What is essential
now is to draw a picture of the overall structure of the crisis, andhaving done so, to establish an order of priority and allocate funds
to methods of linking social sustainability and fiscal
sustainability. ■Professor Miyamotoʼs research focuses on the international comparisonof political processes related to social security and employment policy.
He specializes in welfare politics and welfare policy theory, and advocatesa model of the welfare state based on the Swedish model.

Ultimately, we will need measures
to address the low birth rate

Takeshi Erikawa

Chairman, Saitama Prefectural University,
Chairman, The Health Care Science InstituteJapan’ s enormous fiscal deficit arises from a lack of political(=public) readiness and resolve to adhere to fiscal discipline. As
short-term administrations continue to come and go, parties areseeking to win elections rather than presenting the Japanese publicwith the hard choices, and Japanese society is paralyzed before therisk of an ever-mounting enormous debt. A political system thatplays up to the electorate is fundamentally flawed. We are not,under such a system, fostering leaders with a sense of
responsibility who will guide Japan’ s future.
The issues of realizing fiscal soundness, and also of economic
growth and management of the national territory, will not be
resolved unless we are ultimately able to overcome the problem of
the nation’ s low birthrate. Stable employment for young people isthe key to doing so. We should foster bilingualism within our
education system, to ensure that its graduates are able to flourish
in the international community. We should significantly reducethe burden of educational expenses to ensure that children are able
to receive an education even if their families are poor. We should
also provide more comprehensive social support to women, bothin the home and the workplace.

Even if the birthrate recovers, it will take 20 years before it
becomes of benefit to society. During that period, our only avenue
to realizing fiscal soundness will be to control increases in social
security expenses. According to the estimates of the Ministry of
Health, Labour and Welfare, there will be a significant increase in
medical and nursing care for the elderly in the future. What weneed are policy efforts to control increased demand for services,for example by encouraging the maintenance of health and theprevention of lifestyle diseases. End-of-life care and the issue ofliving and dying with dignity in a long-lived society should beconsidered by society as a whole. With regard to pensions, weshould push ahead with measures such as delaying the age at
which the pension begins to be received and partial employment
for the elderly. To secure resources for the expenditure that will
nevertheless be necessary, we will have no choice but to increase
consumption tax (perhaps to around 20%).
To ensure public understanding towards such severe policies, itwill be necessary for the government to publish administrative
data and to present data when making policy proposals. Taking
pride in their role as administrative professionals, government
officials must offer appropriate choices that will convince both the
public and politicians. ■Mr. Erikawa held positions as an Administrative Vice Minister of the
Cabinet Oﬃce, an Administrative Vice Minister of the Ministry of Health,Labour and Welfare, and President of the National Personnel Authority.
This is a translation of a paper originally published in Japanese.
NIRA bears full responsibility for the translation presented here.

About this Issue

Fiscal Discipline in Japan: An Urgent Issue
The gravity of the state of Japan’s public finances
reveals the limits of democratic politics. During its
long postwar period in government, the Liberal
Democratic Party introduced a universal healthinsurance system and implemented a series ofComprehensive National Development Plans against abackground of high economic growth, winning broad
public support. These policies were possible precisely
because of the state of high growth and population
increase. However, it appears that even in today’s
situation of low growth and population decline, thepublic still holds unreal expectations of the government.
In 1975, “Group 1984,” centering on the late Professor Kenichi Koyama of Gakushuin University,
pseudonymously authored a paper sounding a warning
for Japanese society. Entitled “Japan’s Suicide,” thispaper argued that the collapse of civilization would notoccur as a result of attack from without, but rather as aresult of a process of disintegration from within. It alsostressed that the real danger for Japan was that theJapanese would lose the ability to correctly understandcrises and trials, and that they would become unable toconsider the long-term future and lose the ability for
self-determination.
40 years have passed since the publication of thispaper, but the crisis of Japanese society has only
increased in severity. Democratic politics is not able toimpose burdens on the public commensurate with thelevel of benefit currently being received. Japan’s
continually worsening fiscal deficit will lead to a lossof confidence from the market, and sooner or later thiswill mean market sanctions on a nation becoming a
super-aged society.
How should Japan answer the call of Group 1984 andovercome its public finance crisis? In this issue of My
Vision, we hear five expert opinions on the subject offiscal discipline.

Reiko Kanda, NIRA Executive Vice President

National Institute for Research Advancement (NIRA)
4-20-3 Ebisu, Shibuya-ku, Tokyo 150-6034, Japan(URL: http://www.nira.or.jp/english/)(Facebook: https://www.facebook.com/nira.japan)
For more information： info@nira.or.jp
Tel +81-3-5448-1735
Fax +81-3-5448-1744
Copyright Ⓒ 2014 by National Institute for Research Advancement