This essay highlights Tamura Hideo’s economic analysis, explaining why negative interest rates reflect national credit strength and why austerity policies—especially consumption tax hikes—are the true cause of weak demand in Japan.

February 15, 2016

Recently, I have come to feel that the following commentator is the individual who continues to write the most accurate analyses of the Japanese economy.

The excerpt below is from the Sunday Economic Lecture on page 7 of yesterday’s Sankei Shimbun, written by editorial board member Tamura Hideo, titled “The Government Should Execute a Combined Shift Away from Austerity.”

All emphasis in the text is mine.

(Opening omitted)

With global stock markets unstable due to China risk and falling oil prices, bond prices—seen as particularly stable in value—rise, resulting in the emergence of negative yields.

Japanese government bonds are internationally recognized as high-quality financial assets that can be trusted. Negative-yielding government bonds are therefore also a “source of national pride.”

In attempting to justify consumption tax hikes, fiscal bureaucrats, certain media outlets, and economists have exaggerated government debt and stirred fears of a government bond collapse. Their falsehoods have been unintentionally exposed.

The benefits of negative interest rates accrue first to the government.
For fiscal year 2016, interest payments on Japanese government bonds are estimated at 9.9 trillion yen, assuming a long-term interest rate of 1.6 percent. A mere 1 percent decline in interest rates would reduce costs by approximately 1 trillion yen.

With negative interest rates, bond prices exceed face value, generating issuance gains for the government. Everything about this is beneficial.

(Ending omitted)

Despite unconventional monetary easing, the root cause of weak demand lies in austerity policies such as consumption tax hikes.

The Abe Shinzo administration should not miss the opportunity presented by negative interest rate policy, and should boldly execute a combined strategy—including freezing further consumption tax increases—to shift away from austerity.