Video – Japan at a Crossroads: Fiscal Policy, China, and the Growth

I have limited time today to write a blog post and last night I was sent a new video that I recently recorded with my research colleague at Kyoto University, Professor Fujii where we talk for some hours on the topic – Japan at a Crossroads: Fiscal Policy, China, and the Growth. It was a conversation we had via Zoom that was recorded on Friday, December 5, 2025. We reflect on recent developments in Japan and its relationship with other major countries (US, China, etc) and consider the policy challenges facing the new Takaichi Cabinet. It is a very long session. The transcript was generated by YouTube AI I believe and then edited and is not perfect. A lot of unnecessary aspects are edited out and the latter part of the transcript is really just an AI summary. But I think the record is acceptable. At times, the discussion changed from English to Japanese, where there was some ambiguity in terminology etc, and those segments have been cut from the transcript. I put in timestamps during the transcript to help you zoom into topics of interest. I hope you find something useful in our long discussion.

Thanks to Professor Fujii and his team for recording this discussion and providing the edited transcript.

Transcript

Professor Satoshi Fujii: Thank you for taking time for the discussion about the economics in Japan and the world … I want to ask Bill to have a discussion through Zoom meeting at this time … [based on] … your experience in Japan … So that I hope this discussion would very fruitful with the condition you had experienced the Japanese economics and the Japanese situation and also you during or immediately before you came to Japan this time. So the cabinet has changed. The Takaichi cabinet is the latter pro-action proactive fiscal policy cabinet compared to the previous Ishiba or Kishida cabinet. Even though there is a lot of opponent in the cabinet and in the LDP Liberal Democrat Party and in the Diet and in Japan because hostile people quite much in Japan in everywhere actually. So therefore I believe and I think the Takaichi’s attitude toward the fiscal policy is quite proactive rather than hostility but she cannot do everything what she wanting now. So therefore we have … to precisely estimate her attitude for economic policy. Some are very good in terms of proactive fiscal policy but some might be not so good not good enough in terms of fiscal policy. So therefore I want you to precisely evaluate the Takaichi fiscal policy and economical policy pros and cons. So that would be very very valuable for us. Thank you.

3:50

Professor William Mitchell: Sure. Well, the way the way I look at it is that Japan has caught in what I think is a vicious circle. And the characteristics of that situation after the crash in the 1990s, the sentiment among corporations changed and corporations became very reluctant to invest in the domestic economy. It’s quite clear they’ve got very large stocks of retained earnings that aren’t being reinvested. And at the same time they also became very reluctant to pay higher wages and create stable skilled work. And over this period of course neoliberal ideas that are global were superimposed upon that crisis and employers took advantage of that type of ideology and were only really prepared to create less stable low wage what we call precarious work. And so this is the rise of what in the western world we call the gig economy. The gig economy, service economy, hospitality, food delivery services, Uber, all of these, and a whole range of those type of low paid work which young people really have as the only options they’ve got now. So that’s the other element of it and then of course what that leads to is a low productivity environment because low investment is not investing in best practice technology and a lot of your young workers now are working in low productivity low paid work and as a consequence of that the economy has become stuck. It’s stagnated into a low growth environment and the austerity mindset of the government has accentuated that and made that even worse because the government hasn’t been investing sufficiently either in updating public infrastructure and investing in new technologies particularly those that are going to help the transition away from carbon. And so you’re locked into this vicious cycle and the only way out of that sort of what western economists call secular stagnation, structural stagnation, not just a downturn in the economic cycle, is for a big fiscal shock. That big fiscal shock has to be sufficient to alter the mindset of the corporations, alter the mindset of the workers and households so that households will feel more at ease in spending more not saving as much, and corporations will shift from amassing large stocks of retained earnings and instead investing in new productive opportunities which in turn will lift employment, lift productivity and provide the space in which corporations will be willing to pay higher wages and create better skilled work for young workers. That’s my summary of the situation and that’s why it’s really welcome news that the mentality of the cabinet has shifted a little bit away from the austerity mindset towards fiscal expansion. The only question then is how large that expansion should be and I think the latest is 21.7 trillion. I don’t think that’s large enough to create the shock wave that is necessary.

Sure. Well, the way the way I look at it is that Japan has caught in what I think is a vicious circle. And the the characteristics of that situation after the the crash in the 1990s, the sentiment among corporations changed and corporations became very reluctant to invest in the domestic economy. It’s quite clear they’ve got very large stocks of retained earnings that aren’t being reinvested. And at the same time they also became very reluctant to pay higher wages and create stable skilled work. And at the same over this period of course neoliberal ideas that are global uh were superimposed upon that crisis and employers took advantage of that type of ideology and were only really prepared to create less stable, low wage, what we call precarious work. And so this is the the rise of the what in the western world we call the gig economy … It’s the, you know, the service economy, hospitality, food delivery services, Uber, all of these uh Uber food delivery services and a whole range of those type of low paid work which the young people really have. That’s the only options they’ve they they’ve got now. So that’s that’s the other element of it and then of course what that leads to is a low productivity environment because the low investment is not investing in the best practice tech technology and a lot of your young workers now are working in low productivity, low paid work and as a consequence of that the economy has become stuck. Uh it’s become it’s stagnated into a a a low growth environment and and the the austerity mindset of the government has accentuated that has made that even worse because the government hasn’t been investing sufficiently either in updating public infrastructure and investing in new technologies, particularly those that are going to help the transition away from carbon which every nation is is trying to achieve more or less. And so you’re locked into this vicious cycle and the the only way out of out of that sort of what western economists call a secular stagnation. It’s a structural stagnation. It’s not just a a downturn in the economic cycle. It’s long-term. And the only way you’ll break out of that, in my view, is for a big fiscal shock. And that big fiscal shock has to be sufficient to alter the mindset of the corporations. Alter the mindset of the workers and the households so that households will feel more at ease in spending more, not saving as much. And corporations will shift from amassing large stocks of retained earnings and instead investing in new productive opportunities which in turn will both use better technology, lift employment, lift productivity and provide the vehicle or the space in which those corporations will be willing to pay higher wages and create better skilled work for the young workers. So that’s what I that’s what I uh you know I study Japan very carefully and that’s what I my summary of the situation and that’s why the it’s really welcome news that the mentality of the cabinet is shifted a little bit. uh away from uh the austerity mindset uh towards a fiscal expansion. The only question then is how large that expansion should be and I think the latest is it 21.7 trillion. I don’t think that’s large enough to create the shock wave that is necessary. I don’t think it’s large enough. And the other problem then is a sectoral problem.

Professor Satoshi Fujii: What problem?

9:47

Professor William Mitchell: A sectoral problem. So an industry composition problem … to explain that the problem is that you’ve got excess workers in the service sector in hospitality. There’s too many workers in hospitality and food services and you haven’t got enough workers in construction. So these sectors are unbalanced and if the government’s intention is to inject a lot of fiscal expansion into infrastructure then it also will have to accompany that with a plan to reallocate labor from the excess in the service sector towards retraining in the construction. construction and infrastructure sectors. That’s the challenge. It’s not just just a fiscal expansion. There has to be some retraining and reallocation of workers so that the construction sector can … otherwise you’ll hit bottle what we call bottlenecks where the expansion will just cause excessive uh demand and and cost pressures. So that’s my summary.

11:14

Professor Satoshi Fujii: I see. Thank you so much. So you pointed out the change in fiscal policy in the cabinet to the direction of proactive fiscal policy is welcome that good thing but 21.3 trillion yen fiscal expansion might not be or would not be enough to change the mindset of the people at all perhaps. That too small to change the mindset of the people. And also you pointed out you mentioned the composition or the attitude of the company. So they need to change to increase the wages to increase the investment to increase the more high productive to make high productivity jobs important. So that kind of composition change would be necessary. But if the shock was enough to change the mindset in Japanese people in many realm, so company composition change you mentioned would be urged.

12:56

Professor William Mitchell: I think so. One of the things that’s holding the economy back is the mentality of consumers, households. And one of the best ways in my view to alter that mindset so they’ll be more happy to spend in the domestic economy would be to cut, I would abandon the sales tax because that’s been incredibly damaging to the Japanese economy. We know when the sales tax has been increased, in May 1997 and again later the two extra increases, suddenly household consumption just falls dramatically. And so we know it’s an incredibly effective fiscal tool. We know that the sensitivity of household consumption spending to that tax is very high. So if the government really wanted to stimulate household consumption spending, then that’s a great tool to use in reverse. In other words, cut it. And I know all the arguments that economists both within Japan and outside Japan use to justify that sales tax, but I don’t think those arguments are valid. The government doesn’t need that revenue. And the fact that it’s willing to expand the net position by 21.3 trillion indicates that the current mindset of the government is that they want to have a larger deficit. And I would achieve that and in part one of the things that I would emphasize would be to cut the sales tax significantly. And what you would observe would be a very rapid shift in mindset of households. That’s stage one. And stage two is then working on the corporations to get them to invest more, to employ more people, to pay higher wages and chase productivity. Because the other long-term issue in Japan, as we all know, is that the labor force is shrinking. It’s because the population is getting older and the net birth rate is negative. And what that means is that your younger generations coming through have to be more productive than the older generations who are leaving the economy. Because there’s more people relying on a smaller number of people to produce things. And so the productivity challenge is very large and that should be at the forefront of Japanese policy initiatives.

16:26

Professor Satoshi Fujii: So I guess the austerity mindset in the government can be seen in every countries in the world especially in the western countries. But I feel the Japanese hostility mind is the largest one of the largest terrible situation in the world because every country has the fiscal constraint like debt to GDP ratio or reduction or other things. But Japan is the only one country that the government is obliged to make the primary balance surplus rather than deficit. So I think this primary balance constraint is too strict and the most strict in the world. Primary balance surplus means private balance constraint means that the government cannot issue the bond at all, cannot borrow any money from the bank. This is the meaning of the primary balance constraint. But for example in Europe they have the balance constraint but their balance constraint is always structural balance constraint. Structural means that if the government has lower tax income than the tax income that is expected in the usual economy, this is the structural balance governmental balance. So therefore actually in reality they can issue the bond especially in the situation of the bad economy. And also many other country has the goal of balance is not surplus like a two percent deficit to GDP or one percent deficit to GDP is the constraint. So therefore I think that the primary balance constraint the Japanese government take is the most strict constraint. So that is the most important reason for the long stagnation in Japan. Do you think so. Or do you think also the other countries might be more strict.

19:41

Professor William Mitchell: It varies of course. Different countries adopt different fiscal rules. They’re all restrictive one way or another. If you look at Europe, the Euro zone, unemployment is excessive, growth is very constrained. They’ve had massive crisis during the global financial crisis and those fiscal rules have not helped them at all. If you look at Britain at the moment, the Labor government has said our fiscal rules are non-negotiable, they’re set in concrete, and of course as a consequence the economy is not growing very much and unemployment has risen significantly. So all countries have this problem. Whether Japan’s worse or not depends upon your perspective. But from my perspective the challenges facing Japan are very large. And it’s related to what I said at the beginning about this vicious cycle of secular stagnation. Japan is locked into a low growth, low wage environment. And in that context trying to pursue a primary balance surplus is really irresponsible fiscal strategy. Not responsible. Irresponsible. Because with household savings so high and corporate investment low, the only way you can grow in that environment is if the government runs a deficit. And trying to run a primary balance surplus is the opposite of that. So I think abandoning that fiscal rule and focusing more on the growth rate of the economy, the productivity growth rate, the growth in wages, the improvement in quality of employment are the goals that should be at the center of government mind rather than the achievement of a fiscal surplus in the primary balance. That’s holding the economy back quite substantially.

23:03

Professor Satoshi Fujii: So now the Japanese economy has a problem about the monetary policy also. In the realm of fiscal policy Takaichi’s philosophy is quite anti-hostility but still she cannot expand the fiscal policy more than 21.3 trillion yen. I believe she wanted to expand it more and that is one problem. Another problem is monetary policy. The president of Bank of Japan had changed few years before from Kuroda to Ueda. The previous governor was more towards fiscal relaxation direction but the current one is not so fiscal relaxation person. So he wanted to increase the interest rate because he believes or was made to believe that high interest rate is usual ordinal economic situation. So in order to make the economic situation normal we believe that the interest rate should be increased by Bank of Japan. I think this is quite wrong way of thinking. High interest rate is the consequence of ordinal economics. Therefore it is impossible to make the economy ordinal by means of Bank of Japan’s interest rate increase policy. Takaichi said before she became prime minister that increasing interest rate by Bank of Japan is foolish behavior in this situation. I think that is right saying but she cannot say this as prime minister now. Some people in Japan say that weak Japanese yen is no good. Weak yen makes inflation and inflation makes people poor. This is typical way of thinking. I agree to some extent that too weak yen is bad in short run for people’s daily life but in long run weak yen is good for export. So government should do proactive fiscal policy to save people especially poor people. They can do that easily because tax income increased dramatically due to weak yen but they are hostile people therefore they do not expand fiscal policy. So weak yen just becomes bad for people’s daily life. Therefore currently Bank of Japan should not raise interest rate. So how do you think about this problem. Interest rate, yen, fiscal policy combined. What should government do?

29:34
Mhm. the the there’s there’s the argument about higher interest rates is very a very orthodox argument. Yeah. Yeah. Yeah. And the argument essentially is that oh, Japan’s has inflation at the moment. Mhm. About 3%. M and therefore we need to tighten monetary policy because monetary policy is designed to attack high inflation. Mhm. Yeah. Yeah. That’s that that’s that that’s the standard orthodox argument. Mhm. Okay. First of all, you examine what’s causing inflation in Japan at the moment. And the major factors that are driving the CPI, the inflation uh uh food, food prices. Mhm. And if you look at the most recent data from the the government, it’s it’s food prices. And what what has caused those food prices to increase? Well, climate conditions and and drought and and weather conditions. So in Australia we have sometimes a flood or a fire and a lot of rain and so our our agricultural produce is damaged and suddenly the price of bananas goes high because of demand and supply and then a few months later it’s back to normal … And so the point is, ask yourself the question, how will interest rate increases improve the supply of food into the markets in Japan? Well, of course, no impact at all. Yeah. Impossible. and and so the attack even if interest rate changes are good tools for fighting inflation that’s a separate question but in this case the inflation isn’t being driven by factors that are sensitive to interest rate increases anyway … the food prices in Japan will come down again uh when the when the climate affects … go. So that’s the first point. The second point is that if inflation is temporary, which it is in Japan the the the overall bias in Japan is still deflationary … Still opposite of inflation. The overall mindset among households and business firms in Japan is still a deflationary mindset. Then as soon as those temporary factors resolve themselves in the agricultural sector, you’ll go back to a deflationary period. And so in my view it would be really not responsible for the Bank of Japan to increase interest rates at this time … Now then consider the question of the exchange rate the yen. The yen has depreciated reduced its value against other currencies. That’s true. That’s had some impact upon import prices in Japan. Not as great as a lot of economists have been arguing because the importers, the wholesalers are taking some of the higher import prices in margin rather than passing them on to consumers … but also the lower exchange rate has been very good for your export sector … Now I know from … living in Japan for an extended period and I know from …. talking to people that one of the issues in Japan at the moment is tourism … you live in Kyoto. I spend a lot of time in Kyoto … it’s overrun with tourists … Now that’s partly the impact of the exchange rate … I understand the sensitivity of Japanese people to tourists … but in a way you can’t have it both ways … And what I mean by that is that the tourists are bringing in a lot of revenue and a lot of employment is being created as a consequence of that tourism … somewhere there’s a balance between too much tourism and and not enough given that they they do benefit the economy in terms of providing spending into the domestic sector … I wouldn’t be worried about the yen. I think the yen is … floating up and down and I don’t think it’s a major issue and I think that the … Japanese government has the fiscal capacity to provide some help to households to offset the rising import prices. That’s what I would do. I wouldn’t I wouldn’t try to go for a strong yen. That that mindset is not a sensible mindset ..

37:07

Professor Satoshi Fujii: So if there is no fiscal constraint the government can save people who worry about inflation caused by weak yen. But many people criticize the cabinet about weak yen. Then Bank of Japan might decide to increase interest rate and that is horrible decision. Bank of Japan should not increase interest rate. I saw in Japanese media that prime minister met governor of Bank of Japan. Western economists think Bank of Japan will push up rates. That means monetary and fiscal policy work against each other. Increasing interest rate will damage households especially low income households with mortgages. It would be far better for Bank of Japan to stay out and leave economic policy to fiscal policy.

38:58

Professor William Mitchell: Yes. The exchange rate is consequence of economic situation. Rather than controlling exchange rate, control fiscal policy. Monetary policy and fiscal policy are within the realm of national policy capacity. The exchange rate is an outcome. The problem is that the austerity mindset is dominant in both the public and private sectors. The government has been … fiddling around the edges … Small expansion here, a little bit here is not what you need. You need a big shock. Corporations need to be shocked and understand that the system has changed from deflation … because that’s been … 25 to 30 years of psychology. It thus … needs to be a significant shock to the mindset of the Japanese corporations and households to convince them that the situation now has changed and you’re going into a new era of prosperity and high productivity and high wages and high employment and that’s what’s needed and small changes are not going to be sufficient …

42:54

Professor Satoshi Fujii: So ultimately the austerity mindset contaminates many systems and cultures. That is why we need a big shock. Small expansion is not enough. Corporations and households need to understand system has changed. That’s why 21.3 trillion yen is not enough. During public investment discussion especially national resilience plan, construction labor shortage was used as excuse not to expand investment. This demagogy has been used before. Construction companies can do more. Next time investment should be expanded. There are many similar demagogies.

46:48

Professor William Mitchell: There are constraints in construction sector but you also have too many workers doing too little in other sectors. Many low productivity service jobs could be reallocated and retrained into construction. Policy must include labor market transition. Government is not doing enough there.

Professor Satoshi Fujii: I insisted job guarantee program especially for essential work like construction, agriculture, transport. Essential work is low wage while gig economy and YouTubers have high income. Agriculture is worst. Average farmer income surplus is extremely low. Government must pay farmers because farming is essential. They never do that.

Professor William Mitchell: Young people don’t want low wage hard jobs. To attract workers you must pay higher wages. Companies won’t because austerity mindset. Government must improve attractiveness of essential jobs.

Professor Satoshi Fujii: It is easy for government to support farmers directly. Tariffs are easy but they never do direct support. Japan tariff level is low compared to other countries. Domestic industry is vulnerable. If government is hostile, tariff is second best solution.

1:03:32

Professor William Mitchell: Tariffs are destructive. They raise consumer prices. Better to support industry directly. Encourage investment, efficiency, younger workers. Long-term protection with tariffs does not work. History shows that.

Professor Satoshi Fujii: So two ways to support domestic industry: fiscal support or tariff. Fiscal support is better but government does neither. So if they do not support directly, raise tariff temporarily. But I agree with you ideally direct support is best.

1:21:44

Professor William Mitchell: Food security is important. Japan should aim to feed population domestically. Direct support works better than tariffs. Income support can offset higher production costs without raising supermarket prices.

Professor Satoshi Fujii: Japanese geography is similar to Switzerland. Mountainous, small farmland. So we need fiscal support. Otherwise agriculture will disappear.

Professor William Mitchell: It is under threat. Policy priority should be food security through direct support. Tariffs will just raise prices.

Professor Satoshi Fujii: So conclusion is fiscal support is best. But Japanese government is hostile. Therefore tariff is tentative second best until mindset changes.

2:10:04

Professor William Mitchell: Mindset change takes time. Big shock in 1991 locked Japan into austerity for decades. Sociology changes slowly. You need prolonged fiscal support for many years. Stop-start policy won’t work. Government must send clear signal of sustained support.

Professor Satoshi Fujii: After Takaichi cabinet people feel more optimistic. But austerity power still strong in bureaucracy and media. Democratic process may change that. If anti-austerity forces strengthen, big shock becomes possible.

2:16:24

Professor William Mitchell: China will get stronger because of fiscal support. We should learn from that rather than complain. Otherwise geopolitical instability increases.

Professor Satoshi Fujii: Final question. I expect global financial crisis soon like Lehman shock. Stock prices high, Buffett holding cash. Do you feel same.

2:19:50

Professor William Mitchell: I would call it financial crisis not economic crisis. Financial markets are casinos. Most transactions irrelevant to real economy. Governments can always intervene to protect banks and real economy. There may be correction but not major real economy crisis if governments respond properly.

Professor Satoshi Fujii: So regulation before crisis is important. What regulation would work.

Professor William Mitchell: Most financial transactions are gambling. Banks should be restricted. Ban damaging transactions. Force banks to hold loans on balance sheet. No securitization offloading. Improve lending quality. That prevents crisis.

Professor Satoshi Fujii: So transparency and regulation of banks is key.

Professor William Mitchell: Yes. Regulate away activities that don’t add to wellbeing. Government has capacity to reduce exposure to financial contagion.

Professor Satoshi Fujii: Thank you very much. Three hours discussion. I learned many things. Let’s keep in touch.

Professor William Mitchell: Thank you. Very nice discussion. Let’s continue next time.

Conclusion

You might some useful things from this discussion.

That is enough for today!

(c) Copyright 2025 William Mitchell. All Rights Reserved.