Japans Budget Black Hole: Deregulation of the Workforce and Shortfalls in Government Revenue

By Keiko Shimono

This book describes the astonishing policy failures of populist politicians in Japan. Focussing on popular tax cuts in Japan as a salutary case study, the book details their serious side effects: government debt, cuts to social security expenditure, inadequate public services and even the potential for a national default. The book argues that the only way to maintain a tolerable level of social services is to increase taxation because a government burdened by massive debt levels is unable to respond adequately to a serious threat such as Covid-19.

The book then examines the role of the workforce to economic growth. Due to the dominance of conservative political forces over a long period, workers' protections in Japan are limited, and deregulation of the workforce has led to a decline in wages since 1997. Declining wages and a reduction in social security expenditure have inevitably led to lower consumption and lower economic growth. This examination leads to the conclusion that the way forward is to restore taxation to a sustainable level, which is necessary in order to reduce government debt, to increase expenditure on social security, education, and other essential services, and to combat growing inequality. Only by redistributing income to those who need it and will spend it, consumption will increase, and the economy will grow. 

• Language: English
• Publisher: Anthem Press
• Release date: Jan 18, 2021
• ISBN: 9781785276187

Book preview

Japan’s Budget Black Hole

Japan’s Budget Black Hole

Deregulation of the Workforce and Shortfalls in Government Revenue

Shimono Keiko

Anthem Press

An imprint of Wimbledon Publishing Company

www.anthempress.com

This edition first published in UK and USA 2021

by ANTHEM PRESS

75–76 Blackfriars Road, London SE1 8HA, UK

or PO Box 9779, London SW19 7ZG, UK

and

244 Madison Ave #116, New York, NY 10016, USA

‘Shotoku Zozei’ no Keizai Bunseki: Nihon ni

okeru Zaisei Saiken to Kakusa Shukusho

by Shimono Keiko

Copyright © Shimono Keiko, 2017

All rights reserved.

Original Japanese edition published by Minerva Shobo Co., Ltd.

Copyright © Shimono Keiko 2021

This English edition is published by arrangement with Minerva Shobo Co., Ltd., Kyoto

The author asserts the moral right to be identified as the author of this work.

All rights reserved. Without limiting the rights under copyright reserved above,

no part of this publication may be reproduced, stored or introduced into

a retrieval system, or transmitted, in any form or by any means

(electronic, mechanical, photocopying, recording or otherwise),

without the prior written permission of both the copyright

owner and the above publisher of this book.

British Library Cataloguing-in-Publication Data

A catalogue record for this book is available from the British Library.

Library of Congress Control Number: 2020949905

ISBN-13: 978-1-78527-647-7 (Hbk)

ISBN-10: 1-78527-647-6 (Hbk)

ISBN-13: 978-1-78527-616-3 (Pbk)

ISBN-10: 1-78527-616-6 (Pbk)

This title is also available as an e-book.

Contents

List of Figures

List of Tables

Preface

Introduction

1. The Purpose of This Book

2. The Structure of This Book

3. Things the Reader Should Be Aware of

Part I Budget Deficits Caused by Tax Cuts, and the Risk of Financial Collapse

Chapter One The Causes of Japan’s Government Debt

1. 400 Trillion Yen in Tax Revenue Lost due to Tax Cuts

2. Deficit-Covering Government Bonds and Government Debt

3. Debt-Servicing Costs Weigh Heavily on Annual Expenditure

4. Targeting Social Security Expenditure

Chapter Two The Consequences of a Possible Financial Collapse

1. Bank of Japan’s Exposure to Government Bonds and the Risk of Rate Increases

2. The Downgrading of Japanese Government Bonds and the Cheap Yen

3. Japan’s Post-war Experience of Financial Collapse and Hyperinflation

Chapter Three The Theory behind this Book: Economic Growth through Wage Growth and Redistribution

1. The Decline in Economic Growth in Japan and Its Causes

2. Business Cycle and Japan’s Stimulus Policies

3. What Did Active Fiscal Stimulus and Monetary Easing Bring?

4. Falling Wages and the Need to Strengthen Redistribution

Part II How Cuts to Public Services Affect People’s Lives

Chapter Four Japan’s Preference for ‘Small Government’

1. What Is Government?

2. ‘Smaller’ Government than in the United States

3. Low Expenditure on Social Security and an Emphasis on Self-Help

4. The Choice between ‘Small Government’ and ‘Big Government’

5. The Structure of Revenue and Expenditure in Japan

Chapter Five The Bottlenecks Caused by Cuts to the Public Service and Reductions in Social Security Expenditure

1. Cuts to the Public Service, Increases in the Number of Non-Regular Public Employees, and Reductions in the Social Security Expenditure

2. The Effect on Japanese Society of Having an Inadequately Staffed Public Service

3. Cuts to Social Security Expenditure and the Weakening of the Social Security System

4. Conclusion

Part III Increasing Income Tax as an Alternative Solution

Chapter Six Income Inequality Resulting from Tax Cuts

1. Can a Reduction in Income Inequality Bring about Economic Growth?

2. Small Redistribution Effect of Taxation and Social Security in Japan

3. Income Tax Cuts Favour High-Income Earners

4. Why the Redistribution Effect of Income Tax Has Been Lowered

Chapter Seven Enlarging the Tax Base to ensure a Fair Tax and Social Security Burden

1. Restoring a Sense of Fairness

2. The Need for Personal ID Numbers

3. Enlarging the Tax Base through Curtailing or Abolishing Income Tax Concessions and Special Exemptions

4. Enlarging the Income Tax Base by Abolishing Tax-Exempt Income

5. Simple Trial Calculations when Enlarging the Tax Base

References

Index

Figures

0.1 Comparison of two kind of nominal GDP: 93SNA and 08SNA

1.1 Changes in nominal GDP and tax revenue

1.2 Actual tax revenue compared with estimated tax revenue (1990 taxation system)

1.3 Changes in annual revenue and annual expenditure in the budget

1.4 Outstanding government bonds

1.5 Debt servicing costs and outstanding government bonds

1.6 Japanese social security systems and its financial resources

1.7 International comparison of medical expenditure (2012, percentage of GDP)

1.8 Social security expenditure and consumption tax revenue

1.9 Variations in ‘social expenditure’ (ratio to GDP)

2.1 Changes in government bond holders

2.2 Changes in yield rates for 5-year, 10-year, 20-year and 30-year government bonds

2.3 Fluctuations in interest rates and interest payments

2.4 Movements in the exchange rate (yen against the US dollar)

2.5(a) The downgrading of Japan’s international status (GDP per capita in US dollars); (b) The downgrading of Japan’s international status (GDP per capita ranking).

3.1 Fluctuations in Japan’s economic growth rate

3.2 Business cycle

3.3 Changes in income tax (ratio to GDP)

3.4 Fluctuations in public works–related spending

3.5 Fluctuations in surplus or shortage of funds by sector

3.6 Fluctuations in nominal employees’ compensation

3.7 Changes in nominal wages since 1995

4.1 What is government?

4.2 Comparison between proportional tax and progressive tax

4.3 The ratio of general government expenditure to GDP (total expenditure by the central and local governments and the Social Security Fund, OECD)

4.4 International comparison of public employee numbers per 1,000 members of the population

4.5 Changes in social expenditure (ratio to GDP)

4.6 Breakdown of social expenditure (ratio to GDP, 2009)

4.7 The national burden ratio for OECD countries (to national income, 2012)

4.8 Breakdown of the annual expenditure in the 2015 draft budget

5.1 Changes in the regular staffing of central government administrative organs

5.2 Changes in the number of local public employees by sector since 1994 (100 in 1994)

5.3 Social security expenditure and per capita expenditure for each elderly person over 65

5.4 Imported foods and related products (2012 fiscal year)

5.5 Changes in the number of registrations and the volume of imported foods and related products

5.6 Workers’ compensation claims of karōshi and suicides caused by over work or working environments

5.7 Changes in the numbers of regular and non-regular teachers in public primary and junior high schools

5.8 The wage gap between non-regular teachers (kōshi) and regular teachers (kyōyu) in Osaka

5.9 The ratio of public expenditure on compulsory education to GDP (primary and junior high school, 2007)

5.10 The public pension system

6.1 The income tax base for a typical family with wage earnings of 7 million yen

6.2 Changes in the income tax threshold (for a nuclear family consisting of a couple with two children)

6.3 Changes to the income tax schedule (graphic representation)

7.1 Age distribution of female labour force participation rate (international comparison, using 2012 data for Japan and 2010 data for other countries)

7.2 Personal expenditure and public expenditure on higher education (ratio to GDP, 2012)

7.3 Fluctuations in the ratio of income tax revenue to employees’ compensation and of corporate tax revenue to corporate income

Tables

1.1 Main tax cuts summary

2.1 Changes to the credit ratings of Japanese government bonds

2.2 Changes in the volume of outstanding government bonds, rate against GDP

3.1 Business cycles in Japan

3.2 Fluctuations in the investment returns of managed public pension funds

4.1 Comparison between ‘small government’ and ‘big government’

5.1 The number of labour standards inspectors in various countries (per 10,000 employees)

6.1 Changes in economic growth (average annual economic growth,%)

6.2 International comparison of redistribution effects due to taxation and social security (2010)

6.3 Major tax cuts 1994–2006 (national taxes: individual income tax and corporate tax)

7.1 Income tax deductions for the 2015 fiscal year

7.2 Calculation method for the employment income deduction

7.3 A comparison of the employment income deduction and pension deductions for the 2015 fiscal year

7.4 Survivors’ pension system

7.5 The effect of making the survivors’ employees’ pension taxable

7.6 Estimates of the effect produced by abolishing some income tax deductions and increasing the minimum tax rate (for a household with yearly income of 7 million yen)

PREFACE

This book is a translation from the Japanese original titled Shotoku Zozei no Keizai Bunnseki (Economic Analysis of an Increase in Income Tax) published in 2017, which proposed an income tax increase in order to avoid a possible Japanese default and also to achieve reasonable economic growth. The Japanese edition was the first book I had written for the general public, following the publication of four academic books (one of which received the 37th Japan Economic and Social Science Books Award) and many academic journal articles. In this book I have interpreted published data to give a coherent picture of the status quo.

This English language edition, with additional explanations, was written for those who are concerned about Japan’s huge level of government debt and for those who are interested in Japanese society, its economy, taxation and social security systems, labour market and so on. I do hope that more people will become aware of the possibility of a Japanese default, which is an intolerable risk for the Japanese people and for the global economy as well. Japan is still the world’s third largest economy.

Japan’s debt has already climbed to over 2.3 times its gross domestic product (GDP). Why has Japan been saddled with such an enormous level of government debt, which has risen so rapidly since 1994, when its debt was only 85% of GDP? How does this level of debt influence the everyday lives of Japanese people? Why is Japan’s GDP growth rate less than half that in the United States and the European Union? I shall try to answer these questions by minutely examining Japanese government economic policies, citing long-term data for the period following the collapse of the bubble economy in 1990 and international comparison data from the Organisation for Economic Co-operation and Development (OECD).

Although I examine the existence of ongoing budget deficits as an economic issue, it is also a political one. Japan’s burgeoning government debt is in large part the outcome of the economic policies employed by the ruling Liberal Democratic Party of Japan. Tax cuts and investment in public works have been the highest priority for the party, as they bring high approval ratings. As cuts to income and corporate taxes were applied even since 1990, when the economy collapsed unexpectedly, they lead to a shortage of revenue, but they make the rich richer and inflate corporate internal reserves.

Compounding tax cuts, deregulation of the workforce has contributed to a reduction in tax revenue due to an increase in the number of low-paid workers. These workers need more social security, but the government has been unable to maintain safety nets because of a lack of social security funds. The current poverty rate in Japan is the same as that in the United States (around 16%). An increase of the number of working poor leads to low levels of consumption, and the Japanese economy consequently suffers from low domestic demand and deflation.

Professor Stephanie Kelton, one of the leading economists in the field of modern monetary theory (MMT), suggested in 2019 that Japan is a good example of MMT. That is, Japan has achieved full employment through active fiscal policies, accompanied by the central bank’s quantitative easing policy. According to MMT, the central government and central bank are united in supporting zero interest rates and zero price increases. In this sense, Japan might be a good example of MMT.

The current governor of the Bank of Japan (BOJ), Kuroda Haruhiko, was nominated for the post by former prime minister Abe in 2013, despite a lack of experience in managing financial policy. Subsequently the BOJ commenced large-scale quantitative easing, purchasing government bonds worth 80 trillion yen each year, which was almost equivalent to the central government’s annual expenditure.

However, there are several inconvenient facts that need to be considered. First, the Abe government declared that the aim of the BOJ’s quantitative easing is an increase in prices of 2%. The Japanese government’s economic policies are based on so-called Keynesian economics, not on MMT. Second, the current full employment may be the result of a decline in the labour population due to an ageing population, and not of economic stimulus policies. Third, the Japanese economy has still not responded to economic stimulus policies implemented since the collapse of the bubble economy. The economic growth rate in Japan is less than half that in the United States and the European Union, below 1% on average since 1990. All things considered, Japan could be an accidental example of MMT.

Although politicians and economists who subscribe to MMT are not concerned about the level of government debt, some economists, including myself, are very concerned about it. By 2017, government debt had grown to 2.4 times the GDP or 1,300 trillion yen, which is around 70 percent of total private savings of 1,800 trillion yen. In September 2019, the BOJ held 44% of government bonds, valued at 500 trillion yen, which is over 90% of Japan’s GDP. Is it possible for the BOJ to transition from the current accidental MMT situation, with a zero interest rate, to a normal economy with a positive interest rate? How could the Japanese government and the BOJ avoid a Japanese default in that situation?

It is important to note that the huge level of government debt has already affected ordinary people’s lives. For instance, the smaller number of government employees means lower levels of government service in education, in quarantine, in labour inspection and so on. The lower social security expenditure on pensions, health care and long-term caring makes ordinary people’s lives more difficult and makes private consumption lower due to concerns about the future. This book will show the current Japanese situation under this accidental MMT regime with its huge government debt.

It might be the time to reconsider the government’s function and its fiscal balance, and the social security system as well. Social security expenditure is an easy target when seeking to reduce government debt, but the ongoing Covid-19 pandemic teaches us the importance of maintaining a satisfactory social security system, including an accessible medical service and income guarantee benefits. However, if a government has inadequate revenue, social security expenditure will be limited. Even among the wealthy European countries, Italy, Spain and the United Kingdom have cut social expenditure on medical services in order to reduce government debt, and they failed to save their people in this crisis because of a shortage of doctors and nurses. Financial discipline and low government debt are more important than people imagined.

This book is based largely on my own research in many economic fields, including macroeconomics, public finance, monetary economics, labour economics and social security. Consequently, a large proportion of the sources in the reference section are mine, but I have learned a lot from forerunners. It should be noted that Japanese annual data relating to taxation and finance is based on a Japanese account system from April to March of the following year. OECD data used for comparison, on the other hand, is based on a calendar year that runs from January to December. The differences between them are slight, however, and long-term trends are more important than annual figures. Throughout this book, Japanese names are expressed according to the Japanese convention of giving the surname first, followed by the given name, as in ‘Shimono Keiko’.

Finally, I would like to take the opportunity to thank all the people to whom I am indebted for the publication of this book. Since Japan does not give a second chance to voluntary job leavers even in the academic world, it is not easy for me to continue to conduct research. However, some economists have encouraged me. I am deeply grateful to Amemiya Takeshi, Asako Kazumi, Charles Horioka, Murakami Masako, Murase Hideaki and Noda Tomohiko. I also express my gratitude to the professors who taught me economics: Mathugi Takashi, Muramatsu Kuramitsu, Moriguchi Chikashi and Tachibanaki Toshiaki. The late Professor Uekawa Yasuo supervised my doctoral thesis on wealth distribution and taught me the joy of research work.

I give my deepest thanks to my Japanese publisher Minerva Shobo, Kyoto, for giving me the opportunity to widen the audience of my book to include English-speaking readers. I am indebted to Megan Greiving of Anthem Press for her valuable editorial suggestions, to Dr Hiroko Cockerill for translating the text roughly from Japanese to English, and to Dr Alan Cockerill for his editorial assistance.

July 2020

INTRODUCTION

1. The Purpose of This Book

Japan’s national debt grew rapidly from 1994, when it was around 85% of GDP, to 2012, since when it has hovered around 2.3 to 2.4 times the GDP. This book examines the reasons for this rapid growth in government debt, its impact on Japanese life and a possible path to reducing debt. It should be noted that over 80% of Japan’s debt is central government debt, and whenever I refer to ‘government bonds’ in this book, I mean long-term central government bonds.

In this book I aim to demonstrate three things. First, that the huge level of current government debt in Japan is caused neither by economic stagnation nor by a rapid increase in ‘social security expenditure’ (central government burden of total social security benefits) brought on by an increase in the number of elderly people, but by a policy of recklessly cutting taxes since 1994, particularly income tax, as an economic stimulus measure. This is demonstrated in Chapter 1. ‘Deficit-covering government bonds’, which have been issued to cover the shortfall in revenue that has inevitably resulted from these tax cuts, account for the majority of outstanding government bonds. As the cause of Japanese government debt is tax cuts, and as cuts have been applied mostly to income tax, the way to reduce government debt is not to reduce annual expenditure, but to restore income tax to a sustainable level.

Second, I argue that it is unwise to reduce the number of public employees or to curtail social security expenditure (Chapter 5 is devoted to this theme). The growth in government debt was caused neither by an excessive number of public employees nor by a rapid increase in social security expenditure. On the contrary, reduction in the number of public employees has put downward pressure on wages, and any reduction to social security transfer to the poor immediately reduce the gross domestic product (GDP) by restraining the consumption level of low- and middle-income households. In undermining economic growth, these cuts ultimately reduce government revenue. As a macroeconomist, I believe that economic growth of 2% is indispensable, and I strongly oppose policies that suppress domestic demand and have a negative impact on economic growth.

Third, I suggest that the most effective way to stimulate economic growth in Japan is through a wage growth policy and a stronger redistribution policy, not through traditional Keynesian policy (cutting taxes, increasing expenditure on public works and monetary easing). In Japan, cutting taxes and increasing public investment have been the traditional economic stimulus policies of the ruling Liberal Democratic Party (LDP) of Japan since the Second World War (Ide, 2018). In response to the collapse of the bubble economy, an expansion of Keynesian fiscal policy and monetary easing have been pursued for some thirty years, but these measures have had little effect in stimulating the Japanese economy. The government has spent enough time testing these policies, and it should face the truth that they have not worked well and should implement alternative policies. I believe that in Japan today, where tertiary industries account for 75% of GDP, the most effective economic stimulus measure is neither Keynesian fiscal policy, nor monetary easing, but an employment policy that will encourage wage growth by establishing a higher minimum wage and a redistribution policy to make income distribution more equal by increasing income tax and enhancing social security benefits.

In addition to presenting arguments in support of these three main ideas, this book throws light on certain characteristics of the Japanese economic environment by referring to comparative international data. First, Japan is a nation where the tax and social security burden is among the lowest in the developed world. It provides a low level of welfare support, has an extremely small number of public employees and incurs a relatively low level of social security–related expenditure (see Chapter 4). In Chapter 5, I demonstrate that inadequate social security expenditure threatens the life, property and future of the Japanese nation, citing concrete examples. Second, Japan is a country lacking in transparency and accountability, without any comprehensive system of personal ID numbers.¹ This makes it difficult for the government to accurately assess citizens’ incomes, and hence to achieve a fair distribution of the tax and social security burden. We must realise that in Japan, which is supposed to be a rich country, some people starve to death, as local governments are unaware of those in need, due to the lack of personal ID numbers and adequate information.

Third, Japanese people strongly oppose any increase in tax or premiums, even if it is to be spent on social security to alleviate poverty, because a long-term campaign in the Japanese mass media has portrayed tax hikes in a negative light, and because the dominant LDP has pursued a policy of cutting taxes for so long that people now expect it as the norm. The Japanese people must realise that their income tax burden under the current taxation system is surprisingly light. For example, according to the National Tax Agency’s home page, the income tax burden of a salaryman (an employee) with a yearly income of 7 million yen (a standard household with a full-time housewife and two children) is only 166,000 yen or 2.4% of gross income, because of the numerous income tax deductions (see Chapter 7 for a full discussion). The ratio of income tax burden to GDP in Japan is below the Organisation for Economic Co-operation and Development (OECD) average and is one of the lowest among developed nations. The Japanese national burden, including all taxes and social security premiums, is 27th amongst 33 OECD countries. (see Figure 4.7.)

The Japanese people cannot expect much support from a system with the lowest level of tax and social security burden among the developed nations. The standard of Japanese social security is not as high as most Japanese people believe. The level of support was reduced even further when, in 2013, soon after its inauguration, the Abe government curtailed social security expenditure by reductions of welfare benefits and then pensions, followed by a pruning of medical and long-term nursing services in a society with significantly high aged population. It plans a further reduction in social security services because of a shortage of social security funds. An increase in the consumption tax rate from 8% to 10% was postponed twice: first from October 2015 to April 2017, then again until October 2019. These two delays in increasing the consumption tax rate have reduced revenue by 20 trillion yen over a four-year period. Since the Japanese consumption tax was introduced to fund social security benefits, it is only natural that the government has reduced social security services. If safety nets are lowered, and anxiety about the future intensifies, households save for the future as a precaution, despite any increase in wages. Stagnation of household consumption restrains capital investment by enterprises and prolongs economic stagnation. In these circumstances tax cuts are unable to stimulate the Japanese economy.

Moreover, the Abe government’s controlled annual expenditure resulted in cuts in future investments. I was shocked to see, in the budget for the 2016 fiscal year, that the Ministry of Finance suggested scaling down the number of primary and junior high school teachers by 430,000 over 10 years, on the assumption that the upper limit of class sizes will remain at 40. This measure would reduce annual expenditure by 78 billion yen per year, which is equivalent to the cost of three and half of the Bell Boeing V-22 Ospreys being purchased by the Japanese military. (Seventeen Ospreys are being purchased at a cost of 360 billion yen.) Although the Abe government is well aware that class sizes in primary and junior high schools in major developed countries are generally under 30 pupils (20 pupils in Finland), it plans to maintain an upper limit to class sizes of 40 pupils and bring down the number of teachers under the pretext of declining number of children attending school. The Democratic Party of Japan did manage to reduce the upper limit for class sizes for grade one in primary schools to 35 pupils and planned to extend this smaller class size to all grades. The Democratic Party of Japan replaced the LDP, but only for a short time (September 2009–December 2012). The LDP government, which was back in power in 2012, reversed this decision without compunction.² I wonder how many Japanese people would approve of all the curbs to annual expenditure proposed by the Abe government.

Reducing public employees and social security services and curbing education expenditure is a policy that will have a negative impact on the Japanese economy, now and in the future. Since the underlying cause of budget deficits is overly generous income tax cuts, the appropriate remedy is to restore income tax to a reasonable level. In Chapter 1, I explain exactly how tax cuts have contributed to budget deficits and the appropriateness of increasing income tax. I consider this section of the book to be of interest to everyone.

I have tried hard to make my book as readable and accessible as possible. Non-specialists may find some of the economic and financial terminology unfamiliar, and economists may find some of the explanations insufficiently rigorous in an academic sense. However, as the issues discussed in this book are important for everyone’s future, I urge the reader to be patient and to read to the end of the book. In particular, I would urge young people, who will be adversely affected by any Japanese default, to try and understand what is going on in the Japanese economy. I sincerely hope that the younger generation will understand the risks associated with tax cuts, which make the rich richer and the lives of the poor more difficult, due to a shortage of social security funds, and that they will play a role in deciding their own future.

2. The Structure of This Book

This book consists of three parts and seven chapters. In Part I, I point out that the cause of Japan’s enormous debt is a policy of cutting taxes, mainly income tax. Cutting taxes is a traditional economic measure, which makes the rich richer, but the poor poorer, as government debt forces a contraction in social security services. Japanese economic stagnation is caused by low consumption demand. I present a different approach to stimulating economic growth as an alternative to traditional economic stimulus measures. In Part II, I explain that the current Japanese government has shrunk to a smaller relative size than the US government. Citing concrete examples, I show that a ‘small government’, which takes on a ‘low welfare burden’, is not able to adequately protect life and property or the future of the nation. In Part III, I propose a concrete way to increase income tax, in a way that would enable the Japanese government to reconstruct finances, to maintain the social security system, to increase expenditure on education and to increase the number of public employees.

I argue in the book that the appropriate way to stimulate the Japanese economy is not through cutting taxes and increasing public investment, but through wage growth and larger social security transfers, because 75% of the Japanese are working in tertiary industry, including a variety of service industries that until now have been supported by low-paid workers. Only a reduction in income inequality (improving living standards for those on low incomes) will enable economic growth by expanding household consumption. To reduce income inequality, it is necessary to strengthen the ‘income redistribution effect’. That is, income tax must be increased, and social security benefits must be increased. This will mean that Japan will no longer have such a ‘small government’.

Part I consists of three chapters that explain the possibility of Japan’s default and the economic measures required to avoid it. Chapter 1 is the most important chapter, in which I provide extensive data to prove that the main cause of the dangerous level of government debt has been the relentless pursuit of tax cuts, since the collapse of the bubble economy. Although tax revenue accounted for 70–80% of annual expenditure for most of the post-war period, the ratio of tax revenue to annual expenditure fell rapidly after 1994, when a comprehensive stimulus programme, including tax cuts and public investment on a large scale, began to be carried out and the ratio fell to 40–60%.³ The resulting shortage of tax revenue has been compensated for by the issuing of Tokurei Kousai (deficit-covering government bonds under special legislation). These deficit-covering government bonds are recognised as being ‘special bonds’, the issue of which has to be approved by a resolution of the Diet (the Japanese parliament). In reality, the Diet has proved to be unable to restrain the issue of these deficit-covering government bonds. The cause of expanding government debt is the shortfall in tax revenue caused by tax cuts, necessitating the issuing of deficit-covering government bonds. In Chapter 1, I also show that debt-servicing costs (redemption or refinancing of bonds and interest payments) now account for one quarter of the annual expenditure. This constraint on annual expenditure and the shortfall in tax revenue caused by delays in increasing the consumption tax rate have created further pressure to reduce social security expenditure. (The consumption tax was introduced to fund social security in Japan in 1989.)

In Chapter 2, I present data that suggests that the risk of financial collapse in Japan has heightened. If a financial collapse does occur, hyperinflation (a situation in which prices rise very quickly, possibly at double the price within 3 years, causing damage to the economy) is very likely to follow, as it did in Japan after the Second World War. For the government, hyperinflation may provide a solution to overcoming government debt, but for most Japanese people it will be devastating. Many, especially the younger generation, will have to go overseas to seek employment, as has happened before. Therefore, a financial collapse must be avoided, and to avoid it, a reduction in the level of government debt is an absolute necessity. Despite bleak prospects, tax cuts are still being pursued, and government debt continues to expand. Japanese debt levels have led to lower ratings for Japanese government bonds, and the status of Japan in the international community has also been diminished. The ratings for Japanese government bonds are now even lower than those for Korean or Chinese government bonds. The decline in the status of the Japanese economy has made it difficult for Japanese companies to obtain funds or to conduct economic activities overseas. This affects Japanese economic growth adversely.

In Chapter 3, I explain the background theory of the book. I point out the limitations of Keynesian economic stimulus policy and present an alternative approach. I basically accept Keynesian economic theory in macroeconomics, but I do not believe in the effectiveness of a Keynesian economic stimulus policy that combines public investment, cutting taxes and monetary easing. I think that Keynesian policy is useful for an economy emerging from a depression such the 1929 Great Depression, but can be harmful when implemented during a recession that is part of a normal business cycle.

So-called Abenomics is the large-scale implementation of traditional Keynesian economic stimulus policy, but such measures have been pursued for thirty years since the collapse of the bubble economy without success. In Chapter 3, I suggest an alternative: that the most efficient stimulus measure for Japan, where service industries dominate the economy, is not Keynesian policy, but the stabilisation of employment and an increase in workers’ income by establishing a higher minimum wage and by strengthening redistribution through income tax and social security transfer.

Part II consists of two chapters on government functions. In Chapter 4, I explain the role of government and show that the Japanese government is of an even smaller scale than the US government. Government relies on the collection of tax revenue, with the distribution of tax revenue being decided by the members of the Diet, who are elected by the voters. If voter turnout at elections is low, irresponsible members will be elected, and the use of tax revenue will become irresponsible. If the Japanese people fail to exercise their voting rights and believe that ‘it will make no difference, whoever is elected to the Diet’, the Japanese government will remain a ‘small government’. Small government, such as has been promoted by the LDP, equates to a low level of welfare, an emphasis on self-help and poor provision of public services such as social security and education.

Chapter 5 focuses on the reduction in the number of public officers and curtailment of social security services. Presenting statistical data, I demonstrate that these controls threaten the protection of life and property and the future of Japan. Most Japanese people applaud trimming of the number of public employees. However, such cuts mean that the level of public services inevitably declines. In this chapter, I discuss the roles of specific public employees, such as food sanitation inspectors who are responsible for the quality of imported foods, labour standards inspectors who protect the lives and property of workers and teachers who are responsible for Japan’s future. There have been drastic cutbacks not only in those working in these special roles but also to general administrative public servants. The overtime workload of public employees of central and local governments is increasing. In this chapter, I also discuss elements of the Japanese social security system such as the Public Assistance scheme, the Basic Pension, the long-term nursing service and medical services. I show that the decline in social security services caused by a shortage of revenue and social security funds leads to an increase in the number of people living in poverty, and that we are even threatened with the collapse of the social security system.

Part III consists of two chapters that put forward a proposal to increase income tax. In Chapter 6, I discuss the correlation between income redistribution and economic growth. I concluded in Chapter 1 that tax cuts, which have been carried out almost every year since the collapse of the bubble economy, and have included five major tax cuts of 2–4 trillion yen, have brought almost no improvement to the economy. This view is shared by Professor Ishi, who was the head of the Government Tax Commission from 2000 to 2006 (Ishi, 2008). Moreover, the reduction in income tax revenue caused by tax cuts, and consequent reduction to social security benefits, has lowered the income redistribution effect in Japan and led to greater income inequality. Increased income inequality has depressed household consumption, which accounts for 60% of GDP. Consequently, the Japanese economy has stagnated. Currently in Japan, tertiary industry, which depends on household consumption, accounts for 75% of GDP, so a reduction in income inequality is the key to economic growth. A transition to a European-style ‘big government’ with a ‘high welfare burden’ may well be a good option for most Japanese people.

In Chapter 7, I discuss the Japanese income tax system and suggest an appropriate way to increase taxation. It is fair to impose tax according to the amount of income and to assess income accurately using a system of personal ID numbers. It is not fair to unconditionally give preferential tax treatment to full-time housewives, elderly people, and widows and widowers, nor to ask only high-income earners to carry an excessive tax burden. From the viewpoint of fairness, simplicity and neutrality, I suggest enlarging the tax base by abolishing or reducing income deductions (of which there are currently more than 20), tax-exempt income and tax exemptions. The current tax base for a standard household with a yearly income of 7 million yen is less than 40%, whereas the tax base of comparable households in the United States is 70%, and in the United Kingdom is 90%. If the tax base is enlarged from 40% to 60%, by abolishing or reducing income tax deductions, income tax revenue will increase by 2.5 times. (see Table 7.6). Even when the tax base is enlarged to 60%, the percentage of income tax to income will remain a little under 6%. This is not a heavy tax burden. The base for Japanese corporate tax is also small: only 32%. By abolishing or reducing various deductions and exemptions, the base for Japanese corporate tax should be increased to 50%, on a par with the United States.

Finally, I would like to emphasise the