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Consider Japan

Chapter V

Easy Budgets . . .

Japan’s system of managing its economy has been to run what would be regarded in Britain as very expansionary budget policies, with large planned inc, creases in government expenditure and sizeable reductions in personal taxation a regular feature of most recent years (see table overleaf); and to use monetary policy a and rises in interest rates as the main restraining weapons, when and if any restraints are needed. This pattern has been widely misunderstood abroad, because of the barriers which economists (particularly government economists) raise in the way of understanding each others’ language.

Most Japanese economists will worthily insist – and American economic commentators will generally approvingly report – that Japan has constantly balanced its a annual estimates of budget expenditure and revenue ever since Mr Dodge laid down that balanced budget estimates were the right thing to have. But the balancing act is done in a very peculiar way.

Around the turn of every calendar year (and thus three or four months before the fiscal year begins on April 1st) everybody in Japan seems to enter into an annual guessing game to recommend what the target rate for growth in next year’s gross national product be. The ruling Liberal Democratic party, in solemn convention assembled, recommends that gross national product should grow at one rate; the Ministry of Finance recommends that it would be safer to aim to grow at a slightly lower rate; the Economic Planning Agency makes a final calculation, and the Cabinet splits the differences. Thus one reads in the newspapers that the Cabinet after a long session decided that the rate of growth should be 9.2 per cent in fiscal 1961 or 5.4 per cent in fiscal 1962.


(Billions of Yen, which virtually equal millions of pounds.)

Fiscal Year

Current Balance of Payments Defecit (-) or Surplus (+)*

Value of Tax Relief in That Year's Budget

Growth in Real GNP %

On Personal Income-Tax

On all Taxes



6 1












+ 6.7


+ 36



+ 3.9










+ 8.2





+ 7.1





+ 3.7







+ 39












* Calendar Year

This apparently absurd guessing game, expressed to a precise point of decimals, has a genuine economic importance. For every 0.1 per cent of the agreed target rate for growth in national income the Japanese reckon that they can expect a stated amount of extra tax revenue on the basis of existing tax rates. Thus with a target growth rate of 5.4 per cent in the fiscal year 1962, they reckoned on nearly £500 million of extra revenue; and by the rules of the budget balancing act precisely that sum – together with the surplus of tax revenue carried over from the previous year – is then assumed to be available for deliberate increases in government expenditure or for new tax reliefs. The remarkable feature of the game, from the reflationist’s point of view, is that the larger the target figure for growth which the planners-cum-bargainers eventually decide upon – and the bigger the growth in production in the preceding year (i.e., the nearer the economy has been running to capacity) –the bigger the tax reliefs and deliberate increases in government expenditure which this system tells them it is orthodox for them to give away.

These reliefs, be it noted, are regarded as “orthodox” even in years when the balance of payments has run into large deficit. Indeed, if the gross national product has been rising particularly swiftly during a year of balance-of-payments crisis – which will usually be the case since Japanese balance of payments troubles are generally of the import boomu (Japanese English for boom) type – it is practically certain that the uncovenanted surplus of tax revenue to be carried over into the next year, and probable that the rise in national income to be counted on for the next year as a whole, will be correspondingly high also. Under the rules of the game, this makes it “orthodox” to make the new year’s tax relief or deliberate increase in government expenditure particularly large. Thus in the middle of the balance of payments crisis of 1957 (while Japan’s international exchange reserves were dropping sharply) the income-tax levied on the average lower middle class and upper working class salary was literally cut in half. During the 1961-62 balance of payments crisis, Japanese taxes were reduced by about £116 million (at a time when Mr Selwyn Lloyd, in his July and April budgets combined, was raising British taxes by over £200 million); and this Japanese cut of £116 million, reported the Oriental Economist truthfully, aroused “general public complaint of a conservative tax relief.”

In these circumstances it may seem a bit odd that the Japanese economy ever slows down at all, at any point short of raging inflation. But – at least until 1961-62, when living costs in the big cities suddenly bounded by 10 per cent – the policy has not in fact proved very inflationary (the urban consumer price index rose by some 20 per cent in Japan between 1953 and 1961, against a rise of just over 25 per cent in Britain, while Japan’s export price index has actually fallen in this period). Moreover Japan has consistently managed to escape out of its balance of payments crises and periods of “overheating,” back on to expansion again, much more quickly than Britain. The weapon used to counter periods of overheating has never been fiscal, but always monetary, policy.

The way in which a restrictive monetary policy is worked in Japan at times of balance of payments difficulty – once again, to the foreigner it seems a very peculiar way – will be discussed in the next chapter. But it is worth pausing here to consider the rationale of their system. It is customary in Britain to say that monetary policy cannot work as a restrictive device in times of balance of payments crisis if budgetary policy is pulling the opposite way. Experience in Japan goes a long way towards casting doubt on this belief – because their experience is that the two weapons work with quite different time intervals of effectiveness. Monetary policy works much the more quickly and much the more directly upon the balance of payments, both on capital account (by drawing in loanable funds, such as Eurodollars, from abroad) and on current account (by cutting down imports). By contrast, restriction of demand by higher tax rates works on the balance of payments only after a time lag; and the Japanese say that at times of balance of payments trouble the restriction of demand and imports after a time lag is likely to be the precise reverse of what they want.

Japan’s main imports are (like Britain’s) raw materials and (less like Britain’s) machinery. Both of these forms of imports tend to be highly cyclical (the Japanese recognise, which the British do not always do, that a rush of imports during the period of a restocking or investment boom is likely to be followed by a period of natural slowing down on the reverse arm of the cycle); and both are bought almost wholly on business account. The Japanese reckon that a change in interest rates can alter business spending very quickly. No doubt this swift effect is partly due to the peculiar capital composition of Japanese business enterprises (whose loan capital, on which interest has to be paid, constitutes about 70 per cent of aggregate capital). But one suspects that even in countries like Britain a sharp rise in Bank rate can begin to affect businesses’ inventory policies within a fairly short period, while changes in tax rates work much more slowly than Bank rate, at least as a restraining device; when a British Chancellor imposes a fuel oil tax, for example, there may be some small initial effect on total spending, but a main effect will be to reduce the number of people who would otherwise be using oil for energy purposes anything from six months to three years hence.

Most British policy-makers would presumably agree that usually they do not really know what they will want demand to be doing more than six months or so ahead. The best Japanese planners, by contrast, will say that they do know what they want demand to be doing in the long term; they want it, and production, to be rising by 7 or 8 per cent a year (or whatever is the figure consistent with furtherance of their current long-term plan). It therefore seems logical to them to use fiscal policy as an instrument for steadily increasing long-term demand by something approaching the long-term target figure, while using monetary policy as the weapon to control cyclical fluctuations in the balance of payments during that forward march.

Because the system on which the Japanese budget is drawn up seems so very peculiar – because it appears to encourage inflationary budgets when inflation is already in progress, and could theoretically signal that Japan should introduce a deflationary budget when a recession has cut down tax receipts – it takes some time for the visitor to Tokyo to recognise that the Japanese method of organising economic policy is as sophisticated as it is. But by the end of his stay your correspondent was convinced that the degree of sophistication on these matters in Japan – albeit often behind a screen of flummery words designed to show that they were all very simple and conventional chaps with a lot to learn from the West – is really very high indeed. It also happens to have been a sophistication that works.