AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
NPIRIPS

Nakasone Yasuhiro

The Japan Institute ofResearch Institute for

Peace InstituteInternational Affairs

Peace and Security(Secretariat)

No. 289
6 July 2021

THE SPECIAL ACCOUNT FOR
POST-COVID-19 CRISIS RECONSTRUCTION
AND A CONTINGENCY PLAN TO REDEEM
COVID-19-RELATED PUBLIC DEBT

Motohiro Sato・ Japan is confronted with the medium- to long-termcrises of an aging society and a population decline.
Thus, fiscal expansion should not compromise fiscal
discipline.
・ Similarly to the Special Account for Reconstruction
from the Great East Japan Earthquake, expenses for
COVID-19 countermeasures should be managed
within the special account while enhancing thetransparency of each program.
・ As a contingency plan in the event of a looming fiscalcrisis, Japan should consider a one-time wealth tax.
The views expressed in this piece are the author’s own and should not be
attributed to The Association of Japanese Institutes of Strategic Studies.

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

To address the unprecedented crisis caused by the COVID-19 pandemic,
the government of Japan has undertaken aggressive fiscal stimulus, formulating
three large-scale supplementary budgets and consequently expanding generalaccount spending to more than 170 trillion yen in FY2020. For now, there is noalternative but to finance the emergency expenditures by running fiscal deficits.
More than 200 trillion yen in public bonds were issued in FY2020. The IMF hasestimated that Japan’s gross public debt will hit 260% of gross domestic productin 2020, up from 235% in 2019. The annual budget in FY2021 amounts to about
106 trillion yen, with a five trillion yen reserve fund to cover unanticipated
COVID-19-related spending such as financial support for hospitals andbusinesses. If a “one-time” fiscal deterioration produces a quick return tonormality, fiscal sustainability may not be jeopardized. However, there is the riskthat a fiscal crisis might be triggered by a sharp rise in interest rates. Once theCOVID-19 crisis is over, fiscal consolidation will be inevitable.
During this emergency, fiscal discipline seems to have been undermined.
The transparency and validity of the consignment fees for the Subsidies for
Sustaining Businesses (4.2 trillion yen) and the Go To Campaign (1.7 trillion yen)
are now being questioned. The second supplementary budget of FY2020
included a contingency fund of 10 trillion yen. This may have been partially used
for countermeasures against the second wave of COVID-19 infections, but thelegislature's verification procedures have not been functioning sufficiently in thisregard. Furthermore, the practice of needing to spend contingency funds in fullby the end of the fiscal year leads to wasteful spending. Fiscal expansion should
not compromise fiscal discipline. In addition to the appropriateness of the size ofpayments, the effectiveness of the spending, such as whether employment is
actually maintained as a result of providing the Subsidies for Sustaining
Businesses, for example, needs to be verified. Thus, any non-essential spendingin association with the COVID-19 crisis should be postponed or reduced.
Drastic fiscal stimulus measures are strongly required from theperspective of facilitating rapid economic recovery, but only the size of theeconomic package has been prioritized and fiscal discipline seems to haveeroded. Such a tendency to prioritize the size of the economic package may

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AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

originate from a Keynesian trust in the value of public works, in which digging
holes only to fill them up again is seen as a source of value. People with such
beliefs insist that a project which seems wasteful at a glance may create jobs
and income, thereby spurring demand. As long as money continues to flow into
the economy, it does not matter whether you provide 100,000 yen uniformly orpay expensive consignment fees. However, such a view lacks a future-orientedperspective. Even though a economic package may temporarily stimulate
demand, it is uncertain whether it will lead to "new growth" in the medium to longterm.
On the other hand, many European countries have taken fiscal
measures intensively focusing on sectors relating to future digitalization and thegreening of the economy. Their fiscal measures aim to eventually enhance
growth potential and combat global warming, and are not limited to measures forstimulating current demand. In contrast, the Japanese government's fiscal policy
seems to be short-sighted. Japan continues to lag behind in digitalization andthe current COVID-19 crisis has also revealed some other problems.
Nevertheless, digitalization-related allocations only account for about 1% of thesupplementary budgets. Wise forward-looking spending is urgently required.

In

the United States as well, fiscal mobilization of 200 trillion yen is being carriedout, including a maximum of 150,000 yen in benefits per person. However, thedifference is that the financial situation of the United States is healthier than thatof Japan, and its economic recovery is also more solid.
Whether the overall size of public finances is under control is also inquestion. If the government cannot decrease spending once it has increased it,
no brakes can be applied to the expansion of expenditures and national finances
are highly likely to worsen further. The upper limit for each ministry's FY2021
budget request was eliminated. If soundness cannot be restored to national
finances after the pandemic ends, maintaining social security and other social
systems will become difficult. One option is to separate expenses for COVID-19
countermeasures from the general account so that fiscal expansion would notcontinue after the pandemic ends. Similarly to the Special Account for
Reconstruction from the Great East Japan Earthquake, expenses for COVID-19

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AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

countermeasures should be managed within the special account while
enhancing the transparency of each program. Funding sources for redeeming
government bonds should be specified in advance and the terms of programs
should be limited.
If the government continues to issue debt in such large quantities, withno clear plan for paying it down, the market could eventually lose confidence ingovernment bonds. The Japanese government could continue to rely on theBank of Japan to finance the budget for the time being, but the increase in themoney supply could eventually trigger runaway inflation. Of course, moving too
quickly to raise taxes could exacerbate the recession and put additional strain on
household finances. Once the epidemic is over and the economic recovery wellestablished, however, the government should assess the need for new taxes torepay the debt incurred by the coronavirus response, based on the size of thedeficit and the strength of the economy. Any new taxes should target Japan’s
wealthier taxpayers. As a contingency plan in the event of a looming fiscal crisis,
Japan should consider a one-time wealth tax on financial and real assets(savings, securities, housing, etc.) in excess of 50 million yen. Based on the2014 National Consumption Survey, if a wealth tax of 5% were to be levied on
five net assets of more than 50 million yen and less than 100 million yen, and awealth tax of 10% levied on assets of more than 100 million yen, the tax revenue
would be about 31 trillion yen. This is equivalent to the tax revenue from theconsumption tax. Although there are administrative challenges in implementing awealth tax, such a tax has been established in some countries. From 2010 to2014, Iceland imposed a wealth tax on net worth of over 71 million yen at a tax
rate of 1.5-2%. A wealth tax was also temporarily reintroduced in Spain(Yamaguchi (2015)). In both countries, the wealth tax was imposed as anemergency measure to cope with a financial crisis.
As a pessimistic scenario, the economic downturn (deflationaryeconomy) may continue after the coronavirus pandemic. The economy might nothave the strength to withstand fiscal consolidation. Ironically, the deflationary
economy would continue to have low interest rates and a surplus of money in theprivate sector, and the pressure to undertake fiscal consolidation would be

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AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

weakened accordingly. However, in this case, Japan’s economy would become
poorer. There is no choice but for the government to pursue both fiscal
consolidation and economic revitalization.
The government maintains that now is not the time to consider fiscal
reconstruction, but such a time will surely come. Japan is confronted with themedium- and long-term crises of an aging society and a population decline thatwill further deteriorate its fiscal condition. The government needs to reconsider astrategy for achieving the goal of restoring fiscal health, looking ahead to thepost-COVID-19 era.

Motohiro Sato is a professor at Hitotsubashi University.

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