The following is from Hideo Tamura’s serialized column, published under the title “Ishiba’s Remarks Are Inviting a National Crisis,” in the June 26 issue of Monthly Hanada.
It is a must-read not only for the Japanese people but for readers around the world.
Prime Minister Shigeru Ishiba stubbornly rejects demands for a consumption tax cut coming from both opposition parties and some members within the ruling party, insisting that “a tax cut would reduce funding for social security.”
Instead, he claims he will grow the economy through private-sector-led wage increases.
It is astonishing to see him disregard government spending, which accounts for 60% of Japan’s GDP.
On May 19, Ishiba remarked, “Japan’s fiscal situation is worse than Greece’s.”
As a result, foreign investors began speculative selling, causing Japanese government bond prices to plummet, while on Chinese social media, rumors of a “Japanese fiscal crisis” spread rapidly.
While the Prime Minister clamors that Trump’s tariffs are a “national crisis,” he himself is debasing Japan by spreading fake news.
Japan is the world’s largest creditor nation, with households and corporations holding abundant assets, and over 90% of Japanese government bonds are owned by domestic investors.
Moreover, Japan’s fiscal deficit as a percentage of GDP is the third lowest among the G7 nations, following Canada and Germany.
The originator of the “Japan = Greece” comparison was Prime Minister Naoto Kan of the Democratic Party government in 2010, who, by embracing the Finance Ministry’s pro-tax hike stance, worsened the deflationary recession.
Ishiba appears to be following in those footsteps.
On June 9, Ishiba instructed Liberal Democratic Party Secretary-General Hiroshi Moriyama and others to adopt as a campaign pledge for the Upper House election a plan to raise the average national income by 1.5 times by 2040, with a nominal GDP target of 1,000 trillion yen.
Based on the 2024 nominal GDP of 617 trillion yen, this would require an average annual nominal growth rate of about 3% until 2040.
If inflation averages 3%, this goal could be achieved even with zero real growth.
For reference, from fiscal year 2022—when price increases began to be noticeable—through fiscal year 2024, the average annual nominal growth rate was 3.6%.
However, real wages have continued to decline.
Even if GDP increases due to rising prices, workers become poorer.
On June 13, the Ishiba administration’s cabinet approved the “Basic Policy on Economic and Fiscal Management and Reform 2025” (“Honebuto Policy”), which reflects Ishiba’s preferences.
It proclaims, “Wage increase policies, rather than tax reduction policies, are the key to growth strategy,” and promises to “spread and establish wage increases that exceed price rises while expanding the overall economic pie,” and to create a “growth-oriented economy led by wage increases.”
It is unprecedented for private-sector wage increases to be declared a matter of “policy.”
The “economic pie” refers to GDP, which is the total value-added (gross profits of companies: sales minus procurement costs).
At the same time, it corresponds to aggregate demand, consisting of household consumption and capital investment by the private sector, exports, and government investment and consumption.
For businesses, whether large corporations or small and medium-sized enterprises, without increased demand, it is impossible to achieve wage increases that exceed price rises.
The lack of demand is evident when examining the trends in real wages and net capital investment (capital investment minus depreciation) since fiscal year 1995.
The average real wage in fiscal year 2024 is 17% lower than in fiscal year 1995.
The nominal value of net capital investment was 6.7 trillion yen in fiscal year 2023, only 45% of the 15 trillion yen recorded in fiscal year 1996.
In contrast, the ratio of exports to GDP has continued to rise, reaching 23% in fiscal year 2024, surpassing China’s 20%.
Even during the 1970s, when Japan was known as an “export-driven nation,” the ratio was in the 10% range, and in 1985, the year of the Plaza Accord, it was only 9%.
In 1986, the Maekawa Report, which encouraged a shift to a domestic demand-led economy, was presented to the government, but the export ratio has continued to climb.
After the collapse of the Heisei bubble in the late 1990s, the government became reliant on exports, while fiscal policy remained tight, fixated on austerity and consumption tax hikes.
This included the “structural reform” policies under Prime Minister Junichiro Koizumi in the early 2000s, the “Abenomics” policies under the second Abe administration starting in 2013, and even during the COVID-19 recession after 2020, where increased exports driven by a weak yen remained the sole reliance.
Even if exports increase, fiscal austerity cools domestic demand, preventing private-sector capital investment from growing.
With real wages continuously declining, household consumption stagnates.
Due to low domestic demand, Japan becomes increasingly dependent on exports, creating a vicious cycle.
Where, exactly, has fiscal policy gone wrong?
Each time consumption taxes were raised in 1997, 2014, and 2019, household consumption was not only compressed, but corporate enthusiasm for new hiring, wage increases, and capital investment was also dampened.
Under Japan’s consumption tax system, companies cannot deduct much of their employee salaries, bonuses, or depreciation costs from taxable purchases, which leads them to rely on non-regular employment and be cautious about capital investment.
Meanwhile, because all export sales are fully refunded for consumption tax, companies prefer exports over domestic demand.
Thus, consumption tax hikes may be the root cause of Japan’s unprecedented, ultra-long-term economic stagnation.
Now, Japan is facing a direct blow from the high-tariff measures under the Trump administration.
About 20% of Japan’s exports go to the United States, accounting for roughly 4% of GDP.
Even a 10% drop in exports to the U.S. could push Japan, which currently has near-zero real growth, into recession.
If high tariffs of 25% on Japanese cars, steel, and other exports are implemented, the impact would be even greater.
