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"Lessons from the European 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• 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• Low fertility• Demographic deficits
– Difference: Exchange Rate • Italy in the Euro Area• Japan independent float
2012/2/29 3(c) Takatoshi Ito
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
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
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
2012/2/29 6(c) Takatoshi Ito
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
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)
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
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
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 )
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
2012/2/29 12(c) Takatoshi Ito
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
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
2012/2/29 14(c) Takatoshi Ito
Total population; Italy and Japan
2012/2/29 (c) Takatoshi Ito 15
19501960
19701980
19902000
20102020
20302040
20502060
20702080
20902100
40000
70000
100000
130000
TotalITALYJPN
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
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
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
2012/2/29 18(c) Takatoshi Ito
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
2012/2/29 19(c) Takatoshi Ito
Puzzle, Debt and interest rate
2012/2/29 (c) Takatoshi Ito 20
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
%
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
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?
2012/2/29 22(c) Takatoshi Ito
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
2012/2/29 (c) Takatoshi Ito 23
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?
2012/2/29 (c) Takatoshi Ito 24