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A Liz Truss Moment for Japan?

The Japanese government’s new stimulus package will increase the country’s debt, which already exceeds 250% of GDP, even further. The United Kingdom’s recent implosion should serve as a cautionary tale for Japanese policymakers, who must take steps to reduce unsustainable debt levels before bond markets turn on them.

TOKYO – Former British Prime Minister Liz Truss’s disastrous mini-budget, which crashed the pound and ended her tenure after just 44 days, has quickly become a cautionary tale for policymakers around the world as they debate how to spur economic growth and address rising inflation. But some national leaders – such as Japan’s – have not heeded the warning.

The main feature of the economic plan concocted by Truss and former Chancellor of the Exchequer Kwasi Kwarteng was a £45 billion ($53 billion) unfunded tax cut for the rich. This kind of fiscal stimulus made little sense amid the worst inflationary surge since 1980. Accordingly, the pound plummeted and long-term interest rates soared until the Bank of England had no choice but to intervene to protect pension funds. Truss was ultimately replaced by current Prime Minister Rishi Sunak, who plans to introduce tax increases to fill the fiscal hole created by Trussonomics.

Against this backdrop, Japanese Prime Minister Fumio Kishida’s cabinet this month approved a ¥29.1 trillion ($205 billion) spending package. Most of these measures, which aim to ease the pain of soaring inflation, will be financed by issuing new government bonds, bringing total issuance this fiscal year to ¥62.4 trillion – equivalent to 11.4% of GDP and 37% of the annual budget. While this is an improvement over the 2020 budget, 73.5% of which relied on new borrowing, the increased spending will drive up Japan’s already-elevated debt levels. The country’s outstanding government debt is now expected to exceed ¥1.4 quadrillion, or 250% of GDP.

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