Europe is More Awake than Japan to Fiscal Risks; Govt Debt Has Become a ‘Boiling Frog’ Situation

From left: the policy research chairmen of the Democratic Party for the People, the Liberal Democratic Party and Komeito pose after reaching an agreement on comprehensive economic measures on Nov. 20, 2024.
8:00 JST, February 1, 2025
Debates about fiscal policy in major developed countries reflect the politics and public opinion specific to each country.
As the world returns to normal life after the coronavirus crisis, many developed countries are shifting from expansionary fiscal policy to fiscal consolidation.
In contrast, fiscal soundness is not a significant point of contention among political forces in Japan, making it a unique case among major developed countries. Still, there are concerns that if the Japanese government delays fiscal consolidation, the risk of financial markets forcing it to make sudden adjustments in the future will increase.
The government’s budget proposal for fiscal 2025, which it approved last December, focused mainly on the income tax threshold, known as the “¥1.03 million barrier.”
Following the general election in October last year, the Liberal Democratic Party was reduced to the position of running a minority government, and it needs to cooperate with the Democratic Party for the People to pass the budget bill.
The DPFP argued that the ¥1.03 million annual income threshold should be raised to ¥1.78 million because the minimum wage level today is 73% higher than it was in 1995, when the government set the threshold at ¥1.03 million.
However, the Finance Ministry has estimated that raising the threshold that high would decrease tax revenue by an amount ranging from ¥7 trillion to ¥8 trillion, and the question of how to find the necessary resources to make up for that became a problem.
In the end, the government and ruling parties could not overcome the funding problem, and they put together a plan to raise the annual income threshold to ¥1.23 million without the support of the DPFP.
In the debate over tax reform, the DPFP’s catchphrase of “increasing take-home pay” resonated with the public, a significant factor in the party’s success.
However, from a macroeconomic policy perspective, the DPFP’s proposed reduction of income tax burdens is nothing more than a large-scale permanent tax cut.
Japan’s national debt has exceeded ¥1,300 trillion, and its public finances are at the worst level among major developed countries. The fact that the focus is on a large-scale tax cut at a time when there is no severe economic recession, and a moderate economic recovery is continuing, is different from the current debate trend in other major developed countries.
In a blog post related to the International Monetary Fund’s World Economic Outlook last autumn, IMF Director of Research Pierre-Olivier Gourinchas stated that “the return of inflation near central bank targets paves the way for a policy triple pivot.”
The first pivot is that major central banks in advanced economies have started to cut policy rates.
The second pivot is on fiscal policy. Gourinchas argues that many countries have pursued expansionary fiscal policies for many years to support their economies, which had been hit hard by the coronavirus pandemic. But now it is time to rebuild budgetary buffers by promoting fiscal consolidation.
The third pivot is toward growth-enhancing reforms.
The governments of major developed countries are working to restore fiscal health as they return to normalcy after the coronavirus crisis. However, they face political difficulties as the public vehemently opposes increased burdens.
The debate over fiscal policy is causing political instability.
In Germany, as the country prepared to draw up its budget for the next fiscal year, the Social Democratic Party, a centrist left-wing party led by Chancellor Olaf Scholz, and the environmentalist Green Party called for fiscal spending to stimulate the economy. However, the centrist Free Democrats opposed this, insisting on maintaining budgetary discipline, and the coalition government collapsed.
Scholz lost a confidence vote in the parliament, and a general election will be held in February.
In France, the government aimed to reduce the budget deficit in the debate on the draft budget for social security in 2025, but Marine Le Pen, the leader of a right-wing party, opposed the budget’s increase in the electricity consumption tax and demanded an increase in the pension level. A coalition of left-wing political parties submitted a motion of no confidence, and the Cabinet of Prime Minister Michel Barnier resigned en masse.
In the United Kingdom, the new Labour government that came to power in July last year drew up its first budget. The plan combined a £70 billion increase in spending with a £40 billion tax increase. However, due to a lack of confidence in fiscal policy, there was a sell-off in the government bond market this year, and the cost of long-term borrowing rose sharply, causing the pound to fall sharply. Investors lost confidence in the government’s ability to control debt and keep inflation under control despite Prime Minister Keir Starmer’s efforts to promote fiscal consolidation.
In each country’s political debate over fiscal reconstruction, public support for populist expansionary budgetary policies is present, but another strand of critical public opinion also emphasizes fiscal soundness.
Meanwhile, the major political parties in Japan have a weak commitment to fiscal soundness.
In contrast to the situation in Western countries, the debate in Japan has not become one in which political forces advocating fiscal soundness severely clash with those advocating expansionary fiscal policy.
As the political entities responsible, the government and the LDP are cautious about large-scale tax revenue declines, but they are not making a strong enough case to the public for the importance of fiscal soundness.
With the political forces advocating fiscal soundness on the wane, the Finance Ministry’s bureaucratic organization is bearing the brunt of the situation. On social media, the ministry has even been called the “deep state.”
Why is the fiscal debate in Japan so different from the global trend?
This is mainly because, based on almost 30 years of historical experience, the Japanese people find it difficult to perceive the risks of failing to achieve fiscal soundness.
In the 2010s, Europe experienced the Greek debt crisis in the eurozone, which threatened the euro with collapse. In the European Union, fiscal rules are applied to member states to prevent them from falling into reckless budgetary spending. Germany is also still haunted by the horrors of the hyperinflation that followed World War I.
In the fall of 2022, then British Prime Minister Liz Truss announced a significant tax cut plan that was a centerpiece of her election platform. However, turmoil erupted in the financial markets, with the British pound and government bonds plunging, and Truss was forced to resign after only 1½ months in office.
Japan has the worst government debt of any major developed country, but so far, there have been no noticeable adverse effects that the public can feel.
The Bank of Japan is buying up government bonds on a large scale to keep long-term interest rates down, so there has been no sudden rise in interest rates or collapse in bond prices. Although the yen is weakening, Japan has considerable net foreign assets, so there is no sense of urgency that the currency will collapse.
Although there are warnings that the government should not pass its debt burden on to future generations, people do not feel immediate pain right now.
However, the risk of failing to restore fiscal health can become apparent suddenly.
The rating for Japanese government bonds is still at the lowest level among the Group of Seven countries, even after Italy (BBB), with only a single A+ rating (the S&P long-term issuer rating).
The Bank of Japan is raising interest rates, and interest payments on Japanese government bonds will also increase in the future, making fiscal policy more difficult. The government bond expenditure in the draft budget for fiscal 2025 is about ¥28 trillion, accounting for almost one-quarter of total spending.
There are additional risks we need to consider.
For example, a major disaster could suddenly accelerate inflation. In that case, it would directly affect people living off their savings, such as the pension generation.
Also, the high tariff policies of the administration of U.S. President Donald Trump could significantly impact the global economy.
Politicians should be aware of the weight of their responsibilities.
The Japanese fiscal problem perfectly embodies the proverbial boiling frog. This metaphor — in which a complacent frog in a gradually heating pot of water fails to recognize its peril — warns of both the importance and the difficulty of responding to slowly progressing crises and environmental changes. Will Japan’s politicians bestir themselves to haul the nation out of the pot before it is too late?
Political Pulse appears every Saturday.

Akihiro Okada
Akihiro Okada is a vice chairman of the editorial board for The Yomiuri Shimbun.
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