"Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo...

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"Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29, 2012

Transcript of "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo...

Page 1: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

"Lessons from the European Sovereign Debt Crisis to Japan"

Takatoshi ITOUniversity of Tokyo

Presentation in Ossesrvatorio Asia, Rome, ItalyFebruary 29, 2012

Page 2: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Outline

• Introduction• European Debt Crisis• Japanese Debt Crisis (in future?) • 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

Page 3: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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• Low fertility• Demographic deficits

– Difference: Exchange Rate • Italy in the Euro Area• Japan independent float

2012/2/29 3(c) Takatoshi Ito

Page 4: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Gross Government Debt-GDP ratio Japan used to be respectable, not anymore. Japan is much worse than

Italy now

2012/2/29 4(c) Takatoshi Ito

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

50

100

150

200

CAN: Canada

DEU: Germany

FRA: France

GBR: United Kingdom

ITA: Italy

JPN: Japan

USA: United States

Japan

United KingdomUSA

Italy

Canada France

Germany

Page 5: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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

2012/2/29 (c) Takatoshi Ito 5

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012-10

10

30

50

70

90

110

130

CAN: Canada

DEU: Germany

FRA: France

GBR: United Kingdom

ITA: Italy

JPN: Japan

USA: United States

Japan

United Kingdom

USA

Italy

Canada

FranceGermany

Page 6: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20102011

-12

-10

-8

-6

-4

-2

0

2

4

6

8(Percent of GDP)

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

ItalyCanada

Japan

France

Germany

United Kingdom

United States

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

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Page 7: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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• 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 and

contagion? Let the former default if debt overhang is too much; 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?

2012/2/29 7(c) Takatoshi Ito

Page 8: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

20002001200220032004200520062007200820092010201120122013201420152016-30

-25

-20

-15

-10

-5

0

5

10(Percent of GDP)

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

ItalyIceland

Greece

Ireland

PortugalSpain

2012/2/29 8(c) Takatoshi Ito

Projection

General Government, primary surplus (Euro Area countries with large debts)

Page 9: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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: – 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

2012/2/29 9(c) Takatoshi Ito

Page 10: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Revenue and expenditure

1.0

23.729.0

38.241.9

46.850.8

54.9 54.149.447.2

50.747.9

45.6

5.37.2 7.2 6.79.5

18.5

34.037.5

31.3

44.344.3

38.737.4

15.713.8

17.3

49.1 49.151.0

43.8 43.3

32.430.5

34.9

60.159.854.4

51.051.9

53.952.1

21.9

26.9

81.484.9

89.084.478.578.8

75.973.6

75.170.570.5

69.365.9

61.557.753.653.0

51.550.647.246.9

43.438.8

34.129.1

24.520.9

82.483.7 81.885.584.8

89.3

84.7

92.3

101.0

7.3

35.035.335.5

27.525.4

33.2

9.613.514.212.9

14.013.512.812.3

9.411.36.6

21.2 21.7

30.033.0

52.0

10.716.2 16.5

(20)

0

20

40

60

80

100

12019

7519

7619

7719

7819

7919

8019

8119

8219

8319

8419

8519

8619

8719

8819

8919

9019

9119

9219

9319

9419

9519

9619

9719

9819

9920

0020

0120

0220

0320

0420

0520

0620

0720

0820

0920

10

(FY)

(Trillion yen)

Total Expenditures

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

Total Expenditures

Tax Revenues

Government Bond Issues

2012/2/29 10(c) Takatoshi Ito

Page 11: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Tax Revenues by category, VAT is a best bet

2012/2/29 (c) Takatoshi Ito 11

Individual income tax

Corporate income tax

Consumption tax

Excise Tax

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

0.0

5.0

10.0

15.0

20.0

25.0

30.0

5.5 6.2 6.6

7.8

9.3

10.8 12.0

12.8 13.6 14.1

15.4

16.8 17.4

18.0

21.4

26.0 26.7

23.2 23.7

20.4 19.5 19.0 19.2

17.0

15.4

18.8 17.8

14.8 13.9

14.7 15.6

14.1

16.1 15.0

12.9 12.6

4.1 4.8

5.6

7.9 7.4

8.9 8.8 9.1 9.8

11.3 12.0

13.1

15.8

18.4 19.0 18.4

16.6

13.7

12.1

12.4

13.7 14.5

13.5

11.4 10.8

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 5.25.65.65.86.1

9.310.110.4

9.89.8

9.8

9.7 1010.610.510.310 9.89.6

Various TaxesIncome

Corporate

Excise

Consumption

( trillion yen)

( 年度 )

Page 12: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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– 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

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Page 13: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

2012/2/29 13(c) Takatoshi Ito

2010MaleMale Female

Population, 10,000

Baby boomer generation is about to retire

No third baby boomSecond Baby boomer generation,

sons and daughters of the first

Page 14: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Demographic deficits

• Both Japan and Italy faces – a sharp decline in the working age population

ratio– A sharp increase in the retired population ratio

• Japan will also faces the rapid decline in total population

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Page 15: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Total population; Italy and Japan

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19501960

19701980

19902000

20102020

20302040

20502060

20702080

20902100

40000

70000

100000

130000

TotalITALYJPN

Page 16: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

2012/2/29 16(c) Takatoshi Ito

19501960

19701980

19902000

20102020

20302040

20502060

20702080

20902100

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

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

Italy

Japan

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

Page 17: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

2012/2/29 17(c) Takatoshi Ito

19501960

19701980

19902000

20102020

20302040

20502060

20702080

20902100

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Retired population ratio: Ages 60 and over/Total population

Japan

Italy

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

Page 18: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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• 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

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Page 19: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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%)– Japanese residents hold 95% of JGBs– Japan has current account surpluses (although trade

account turns negative recently)– Vast room for tax increases

• The sooner the better– Demographic change is very adverse

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Page 20: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Puzzle, Debt and interest rate

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19901991

19921993

19941995

19961997

19981999

20002001

20022003

20042005

20062007

20082009

20100

100

200

300

400

500

600

700

0

1

2

3

4

5

6

7

8

JGBdebt JGBrateTrillion yen

%

Page 21: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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 45-50

trillion yen• Personal income tax increase will miss baby

boomer generation to be taxed. • Corporate income tax increase will hasten

hollowing out—bad for growth2012/2/29 21(c) Takatoshi Ito

Page 22: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Italy and Japan, common challengesfiscal crisis

• What did Italy learn from the European Sovereign 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 job than politicians?• Why do politicians fail to make right decisions?

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Page 23: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

Italy and Japan, common challengesfiscal crisis

• What can (should) Japan learn from the current European crisis?– When a crisis happens, it gets worse quickly– What takes to calm the market once the crisis occurs

requires much more austerity than restoring sustainable path during the non-crisis time

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

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

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Page 24: "Lessons from the European Sovereign Debt Crisis to Japan" Takatoshi ITO University of Tokyo Presentation in Ossesrvatorio Asia, Rome, Italy February 29,

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

economies• Low fertility rate– Japan, Korea, Hong Kong, Singapore and Italy? – Will immigration be an answer?

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