[Market Economy Guide] Japan’s Failed Economic Stimulus Policies

They gave ¥20,000 worth of gift certificates to each of 36 million people,

but all that happened was that government debt increased, while the economy did not recover.

If we hand out gift certificates, people will spend them!

In November 1998, the Japanese government announced emergency economic measures in an attempt to reverse the prolonged economic slump. At the time, it involved the injection of ¥24 trillion in public funds, the largest amount in Japan’s history. But despite this enormous emergency stimulus package aimed at boosting the economy, the Tokyo stock market showed no reaction whatsoever. In fact, the day after the Japanese government announced the emergency measures, Moody’s, the U.S. credit rating agency, even downgraded Japan’s government bond rating by one notch, from the top-grade Aaa to Aa1. Japan’s government tried several more times to stimulate the economy, but nothing proved effective or won market support. Instead, the measures were met with a cold response and even ridicule.

Unable to endure the situation any longer, the Japanese government introduced an ambitious new policy in 1999. It was, of all things, “gift certificates.” The “distribution of gift certificates,” agreed upon by Japan’s two parties, the Liberal Democratic Party and Komeito, was intended to stimulate consumption. The plan was to provide ¥20,000 in gift certificates per person to a total of 35.9 million people, including all households in Japan with children aged 15 or younger and recipients of elderly welfare pensions. A total of ¥700 billion was spent on distributing the gift certificates. But why gift certificates in the first place? The Japanese government worried that if it handed out cash, people might save it instead of spending it as intended. The policy also aimed to help revive the retail sector, which was suffering from chronic recession.

Saving by cashing out gift certificates

The government’s attempt to promote consumption and revive the economy by distributing gift certificates was an unprecedented experiment, one with virtually no parallel anywhere in the world. Unfortunately, however, the Japanese government’s gift certificate idea not only failed to revive the Japanese economy, but produced disastrous results and became an object of international ridicule. It had no positive effect on economic recovery and only increased the burden on the public. Why did this happen?

First, many Japanese who received the gift certificates simply sold them at a discount. They converted the certificates into cash by selling them below face value and then saved the money. As a result, the consumption-boosting effect the government had intended was close to zero. Instead, the only ones who profited from the gift certificate distribution were private moneylenders and the yakuza, who led the discounted trading of the certificates. The cost of distributing the gift certificates became a direct fiscal burden on the government and ultimately came back as a burden on the Japanese people. The Japanese government, having borne an enormous fiscal cost and provided the certificates as a kind of welfare benefit, could do nothing but sigh deeply.

Only national debt increased further

As of 2018, Japan’s national debt exceeded ¥1,100 trillion. Converted into Korean won, ¥1,100 trillion amounts to the staggering sum of approximately 11,897 trillion won. Written out numerically, that is 11,897,000,000,000,000 won. It is such a vast figure that even counting the digits to grasp its scale feels unfamiliar.

The biggest reason Japan came to shoulder such an enormous national debt lies in expanded government spending through economic policies aimed at stimulating the economy. The government continuously spent astronomical amounts of public funds, exhausted its budget, and then filled fiscal holes by issuing deficit-financing government bonds because tax revenue was insufficient. As a result, the debt snowballed. Japan’s national debt of ¥1,100 trillion translates into a burden of about 94 million won per person. If Japan’s national debt continues to rise, then far from preserving welfare, all citizens will ultimately be plunged into severe economic pain and anxiety.

Fiscal spending cannot revive the economy

People often say that neighboring Japan is like a mirror for us. Japan, once proud of its stature as the world’s second-largest economy, is now a thing of the past. Having stopped growing, Japan struggled under the pain of prolonged stagnation. Even Sony and Panasonic, once renowned for world-leading technology and brand recognition, gave up their top positions long ago. The Japanese government tried to maintain the same welfare policies while taking on massive debt, but in an economy without growth, it is impossible to secure the necessary resources to support them. In the end, the burden on the people only increased. In this way, Japan’s lost 20 years became 30 years.

Japan is now struggling to rise again. But the burden of its increased debt has not been easy to resolve. In the end, it is raising taxes to manage the debt. The lesson of Japan’s national debt is that governments must not make the mistake of clinging to futile fiscal spending, such as handing out gift certificates.

In November 1998, the Japanese government announced emergency economic measures in an attempt to reverse the prolonged economic slump. At the time, it involved the injection of ¥24 trillion in public funds, the largest amount in Japan’s history. But despite this enormous emergency stimulus package aimed at boosting the economy, the Tokyo stock market showed no reaction whatsoever. In fact, the day after the Japanese government announced the emergency measures, Moody’s, the U.S. credit rating agency, even downgraded Japan’s government bond rating by one notch, from the top-grade Aaa to Aa1.

■ Please remember

In 2018, Japan’s national debt exceeded ¥1,100 trillion. The biggest reason Japan came to shoulder such enormous national debt was the expansion of government fiscal spending in an effort to revive the economy. The government poured in astronomical amounts of public funds, exhausted its budget, and, with tax revenue falling short, filled fiscal gaps by issuing deficit-financing government bonds. As a result, the debt snowballed.

Sung-no Choi, President, Center for Free Enterprise (CFE)

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Original title: [시장경제 길라잡이] 실패한 일본의 경기 부양책

Author: Sung-no Choi

Date: 2020-05-04

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=8&idx=22582