IMF now claiming that Japan has to inflict austerity when the government’s current policy settings a maintaining stability

It was only a matter of time I suppose but the IMF is now focusing its nonsensical ‘growth friendly austerity’ mantra on Japan. In a recent interview, the former Portuguese Finance Minister now in charge of the IMF’s so-called ‘Fiscal Affairs Department’, Vitor Gaspar claimed that Japan is now in a precarious position and must start to impose austerity. Recall last week that I concluded that – The IMF has outlived its usefulness – by about 50 years (April 15, 2024). The current interventions from senior officials such as Gaspar only serve to reinforce that assessment. The problem is that they are still able to command a platform and a significant number of people in policy making circles actually believe what they say. It would be a much better world if the IMF and its toxic ideology and praxis just disappeared off the face of the Earth. Then we could send all the highly educated officials to thought reassignment camps to allow their considerable intellectual capacity to search for cures to cancer or whatever.

Gaspar’s record in Portugal when he was Finance Minister (June 21, 2011 to July 2, 2013) was predictable – austerity austerity austerity.

He had been installed as the Finance Minister from his job at the ECB, another unelected European appointment that then thinks they have the impramatur to wreak havoc on peoples’ well-being.

He oversaw massive tax increases, extensive public sector employment and wage cuts, stringent government spending cuts on state services in healthcare, education and social security.

By the time he resigned Portugal had endured three years of recession and the unemployment rate had risen to 17.5 per cent.

GDP (size of the economy) had shrunk by 5.7 per cent – a major decline.

It wouldn’t be until the March-quarter 2017 that the economy once again reached the level it had attained at the onset of the GFC.

Effectively he was just the EU-IMF puppet – they gave the country some pennies under the threat of bankruptcy.

Of course, the EU was never going to let Portugal default because it knew that if one country found the greener pastures outside the Eurozone straitjacket at the time, then there would be a stampede for freedom from other nations – Greece, Italy, etc.

He was deeply unpopular for the harsh attack on the well-being of the low income citizens and was forced out of office as a result.

I recall being in Lisbon around then and watching taxi drivers waiting at their ranks pushing their cars by hand – one car at a time – as the space ahead of them in the queue became available.

I asked why – naively – and was told that they were trying to save on petrol because times were so hard.

Gaspar claimed that he resigned because he lost credibility when he failed to achieve his fiscal targets.

And why were we at all surprised by that failure at the time!

The fiscal deficit forecasts of 5 per cent in 2012 were reliant on so-called ‘growth friendly austerity’ predictions about the response of domestic consumption expenditure to the austerity.

The IMF typically claimed that the austerity multipliers would be small and that households would respond favourably to the cuts and flood the state’s coffers with tax revenue, thereby delivering the targetted fiscal outcome.

Of course, domestic consumption fell through the floor, tax revenue plummetted and the fiscal deficit went to 6.5 per cent of GDP.

Totally predictable unless one was locked in the EU-ECB-IMF Groupthink at the time.

He is also still embroiled in a scandal relating to the privatisation of the state-owned electricity company EDP.

EDP has been accused by Portugal’s Competition Authority of massive price gouging through the manipulation of the electricity billing system (Source).

The company apparently used contacts within the government to influence the compensation payments from government for having stand-by capacity.

A report said that “its shareholders, including US and Chinese funds, realise that the price they paid for the company reflected profits that illegally were being squeezed from consumers.”

In other words, the government allowed the sale price of EDP to be inflated as a result of the illegal consumer pricing, which were a significant reason that electricity prices had risen by 50 per cent since 2006 (up to 2018).

The company also declined to pay the state special austerity tax levies.

Apparently, when Gaspar was told of the rorts when he was Finance Minister he kept the matter secret in order to gain a higher sale price in the privatisation of EDP.

The losers have been the consumers and business that have paid massive increases in energy costs

So, all round, who better to lecture Japan on what it should do with respect to its fiscal policy settings?

Like most of these leaders in Europe during the GFC who imposed dreadful misery on the citizens, they either retired gracefully with handsome pensions or just went through another revolving door into some other highly paid and powerful position.

Gaspar went from ECB to Minister of Finance to the IMF – with a trail of destruction in his wake.

In October 2023, he started to put pressure on the Japanese government, claiming their public debt-to-GDP ratio was dangerous and that their “top priority” had to be the “introduction of a ‘risk-based medium-term fiscal framework'” (Source).

He also told the press:

Given the long-run nature of the challenges that are relevant to Japan (notably, an aging population), together with the very high level of public debt, having a strong public finance anchor … would be a very good contribution to strengthen the credibility of Japanese public finances.

All of that is just IMF mumble-jumble nothing speak for austerity.

He claimed that “Japan stands out even on a global scale” which is true but not in the way he wanted the readers to understand.

Japan does stand out because it has proven for more than 3 decades that the IMF approach to fiscal matters is simply counter productive.

His intent was to scare people about the debt ratio, which is around 260 per cent and high by global standards.

But meaningless in relation to the capacity of the Japanese government to continue supporting the nation’s prosperity.

He wanted to give the impression that somehow, the Japanese government which issues the yen and is the only entity to issue the yen could somehow run out of money because the ‘investors’ might stop extending loans.

You notice how these discussions always unfold.

1. Start with a non sequitur – in this case that the government requires private investors to loan it yen in order to spend yen when clearly the yen can only come from the government in the first place.

2. Once the fiction is assumed – that the Japanese government has to borrow in order to spend – then the narrative unfolds easily – too much debt, Government finances ‘lose credibility’, risk rises, stop investing.

3. Government goes broke.

4. Horror.

Of course, if one starts with the valid premise that the government doesn’t need to borrow yen in order to spend it because it issues it, then the chain of logic changes dramatically and one sees through the IMF motivations – to reduce the size of government, sell off public wealth to private predators, and inflict misery on citizens so they will not demand high wages and profits will be higher.

Anyway, in the last week, Gaspar was at it again.

He told the media that the Japanese government must “start the process of fiscal consolidation” (Source) – which is more IMF mumbo jumbo for massive public sector spending cuts, increased taxes, and more.

Gaspar is a one-trick pony and because of the way the elites operate his past applications of that trick never catch up with him.

The reasoning now for the IMF is that:

… economic activity is running close to potential … From that viewpoint, it also makes sense to think about what kind of fiscal policy Japan should pursue so as to build the foundations for market confidence and macroeconomic stability.

Noting the non sequitur again that the ‘market’ has to have ‘confidence’ to ensure ‘macroeconomic stability’.

What would happen if the bond markets, which have an unquenchable thirst for JGBs, decided they had had enough?

Even though that will never happen, the answer is nothing of importance would happen.

Gaspar wants the government, initially, to stop providing energy subsidies to households and firms.

These subsidies have helped the citizens and businesses cope with the rising cost of living pressures over the last few years, which have been highly beneficial, particularly to lower income workers.

They have allowed the country to work through the supply-constrained inflationary pressures and get inflation down to around 2 per cent now (lower than most) without the need for painful interest rate hikes.

But helping households isn’t in the remit of the IMF!

The most ridiculous thing about all this – ideological issues aside – is that the IMF narrative deliberately avoids talking about the elephant in the room.

It is possible that Japan is now operating close to capacity.

It ageing population is making it harder to grow more quickly and from my perspective that is a good thing.

It will demonstrate what a degrowth agenda looks like in the years to come.

And, its unemployment rate is very low, which means there are not too many idle workers in need of a job.

But here is the question you should ask – why is it in this state?

The IMF wants us to believe that the high deficits are sort of detached from the ‘close to capacity’ performance of the Japanese economy, when the reality is that they are integral to it.

Any attempts to start cutting back on the role of government in Japan – cutting spending, increasing taxes, etc – will quickly see excess capacity increase and unemployment rise.

We have seen that each time these ‘consolidation’ attempts have been introduced via the sales tax hikes – in April 1997, then April 2014, then October 2019 – that household spending has collapsed and the economy has been driven into or towards recession.

The point is that the current stability in Japan in terms of employment, output growth, and the like are exactly because the Japanese government is running the fiscal policy in this way.


Another volley of predictions about the demise of Japan and in time they will come to nothing.

This has been a regular pattern since the 1990s as the mainstream institutions struggle to reinstate their position as the bullies.

Fortunately, Japan has its own currency and is not weak and divided like Greece.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.

This Post Has 6 Comments

  1. Japan needs to put its foot down.

    I am almost certain the US uses the IMF to ensure its own economy is the best on paper, by weakening others.
    Since the major ‘shareholder’ and therefore voting controller is the US. Well…

  2. I wonder what the imf will do if Japan sends gaspar and all the the other imf chumps to give the dog a bath?
    Are they going to take hold of Japan’s assets abroad like they did with Venezuela?
    Are they imposing sanctions, like they did with South Africa?
    Or are they bombing Japan?

  3. …’the very high level of public debt,’
    Change the framing –

    debt bad
    public debt bad ?!

    risk-free-debt good
    public risk-free-debt very good

  4. Weird how they always go after energy subsidies first.

    The first thing IMF wanted gone in Sri Lanka and Pakistan was the energy subsidies.

  5. Re Japan being close to ‘full capacity utilizaton’: Yellen wants China to believe it has an
    over-capacity problem, which is complete nonsense in a nation in which half the population is still poor…

  6. I very much hope that the Japanese government listens to the MMT community and not the IMF. Japan should have a renewed kind of “sakoku” or closing off of its borders to silly economic ideas like “fiscal austerity will cause growth”. Japan has done very well in many areas of life and culture by keeping malign influences at bay. Perhaps they will politely listen and then calmly carry on doing what they know works best.

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