2010 June 30 - July 6 [
FINANCE]
What lessons can be drawn from Greek fiscal crisis?
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July 2, 2010
If Japan continues to follow the present path, it will become like Greece in two or three years, or even in one or two years.” This is what Prime Minister Kan Naoto is repeating claiming during the ongoing Upper House election campaign, threatening voters with the claim that their nation will fall into a financial crisis like Greece if they do not approve a consumption tax hike now. This argument can be shown to be false by the following two points
More than 70 % of Greek debt owned by foreigners
Comparing the two countries’ debt level, Japan’s debt amounts to nearly 200 percent of its GDP while that for Greece is a little more than 100 percent of its GDP. Both of their debt-to-GDP ratios is about 80 percent when considering their net debt, the amount calculated by deducting government financial assets from the total debt.
However, what should be emphasized is who owns these debts. In Japan, domestic financial institutions are the major holders of the bonds issued by the government. More than 90 percent of government bonds are domestically owned while only seven percent are held by foreign investors.
In the case of Greece, more than 70 percent of its national bonds are in the hands of investors outside the country. Given the fact that about 50 percent of such bonds in the United States and Germany are possessed by foreign investors, it can be said that Japan’s rate of public bonds owned by foreigners is low.
Whether selling government bonds domestically or overseas will create totally different outcomes in the country’s economic conditions. Interest payments received on government bonds will circulate within the country if the bonds are owned by domestic investors. On the other hand, they will flow outside the country if foreigners are the major bond holders.
The other major difference is the danger of a possible increase in the speculative trading of public bonds. Greece, whose bonds are mainly owned by foreign investors, has witnessed a sharp fall in stock prices since the bond holders offered them up for sale all at once.
Corporate tax cuts led to huge financial loss
One of the factors that caused the Greek fiscal crisis was its drastic reduction in the corporate tax rate.
The corporate tax rate in Greece until 2000 was the same as Japan, 40 percent. This has been steadily decreased for 10 years to the current rate of 24 percent. Because of this, corporate tax revenues dropped from 4.1 percent to 2.6 percent of the nation’s GDP during the period between 2000 and 2007.
The 1.5 point cut in corporate taxes would be equivalent to a seven-trillion yen loss in corporate tax revenues for Japan.
The Greek government has raised the consumption tax rate from 18 to 19 percent in 2006 and to 23 percent this year. However, the revenue from the consumption tax has not been able to cover the loss caused by the corporate tax cuts. This has accelerated the fiscal crisis.
In Japan, business circles as well as the Economy, Trade and Industry Ministry are calling for the effective corporate tax rate to be lowered from 40 to 25 percent. The ruling Democratic Party of Japan, led by PM Kan, has included the corporate tax reduction demand in its election platform.
However, what we need to realize is that by implementing what they have been calling for, in 10 years Japan may suffer from its financial collapse as Greece is now suffering.
- Akahata, July 2, 2010
