Japan Election: The First Blow To Global Austerity Plans

The ruling Japanese party, the Democratic Party of Japan (DPJ), lost its control of the upper house of the nation’s legislature. The results may make it harder for the DPJ to push forward it initiatives which include higher taxes and austerity programs which were set to be enacted almost immediately. Prime Minister Naoto Kan may even lose his job.

The press characterized that election results as a sharp rebuke to plans to cut the Japanese deficit, which is high enough to jeopardize the nation’s ability to raise capital at low rates. It was worse than that. The vote was a bludgeon to the the heads of  nations  trying to reign in spending and increase receipts as a way to show the capital market that their  sovereign debt will be a less risky investment in the future. Most of the current, major austerity programs have been put into place in Europe where the ratio of deficits-to- GDP is high. Greece, Spain, Germany, and the UK have been especially strict in their plans to slash social spending and raise taxes. The political support for these actions has been shaky, but most of the plans have been approved by national legislatures. That may well change.

Voters is Japan have elected to put off the problems of the deficit to another day. They are not willing to suffer through a correction of past excesses in the name of sacrifices that will improve their nation’s financial strength for future generations. Alternatively, they believe that low taxes and strong government spending will help pull Japan out of its current economic slowdown. Tax cuts should increase the incentives for business and workers to increase productivity and keep more of the fruits of their work. That, in turn, will strengthen the pool of money which can be taxed.

There has already been unrest in Greece and Spain as the sitting governments have voted to take away decades-old social safety nets and what many economists believe are excessive benefits for government workers. Each ruling party also believes that high taxes and better tax collection will cut their GDP-to-deficit ratios and make their sovereign paper more attractive.

But the voter repudiation of the DPJ in Japan is a sign that there will be similar pressure on ruling parties in the Eurozone. Those politicians who have championed austerity may find that they are thrown out of office in favor of legislators who support that polices that have been in place for years. The philosophy that stimulus spending is the best way to solve national economic problems will have won as it did in Japan.

Douglas A. McIntyre