Japan's Reconstruction Down Payment

May 2, 2011 4:45 PM

Today the Japanese Diet passed a 4 trillion yen supplementary budget to support earthquake and tsunami reconstruction. The amount is roughly one-sixth of the baseline estimate of 25 trillion yen (around 5 percent of GDP) over 3 years. The extraordinary thing about the "supplementary" budget is that it is being advertised as entirely financed by expenditure reallocations and will not require any additional bond issuance, raising the question of exactly how "supplementary" it actually is. Indeed, some additional temporary stimulus could be warranted under the circumstances.

Japan has a long history of budgetary legerdemain, so one should not take the "no new bonds" claim at face value. Nevertheless, in light of poll results indicating that a majority of Japanese would like to see rebuilding financed at least partly through the shared sacrifice of tax increases, it suggests that bond issuance for rebuilding may be well below the 25 trillion headline figure. The apparent preference for expenditure switching and tax increases at a minimum calls into question the timing of last week's downgrade of Japanese government debt by Standard and Poor's. Presumably S&P knew back in March, like the rest of us, the rough magnitude of expected rebuilding costs. With the political winds blowing in favor of expenditure switching and tax increases not bond finance (whatever one thinks of the wisdom of this approach), the timing of the S&P's downgrade would seem perplexing, to say the least.

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