일본 재정의 지속가능성과 재정규율에 관한 연구 (A Study on Japanese Fiscal Sustainability and Fiscal Discipline)

292 Pages Posted: 16 May 2014 Last revised: 27 May 2014

See all articles by Gyupan Kim

Gyupan Kim

Korea Institute for International Economic Policy

Hyong-Kun Lee

Korea Institute for International Economic Policy

Eunji Kim

Korea Institute for International Economic Policy

Young Suh

Korea Institute for International Economic Policy

Date Written: December 30, 2013

Abstract

Korean Abstract: 본 보고서는 2011년 동일본대지진을 거치면서 일본 재정의 지속가능성에 관한 논의가 재점화되고 있음을 지켜보면서, 일본 정부의 재정규율 메커니즘을 집중 분석하였다. 특히 일본의 중앙정부뿐만 아니라, 지자체와 사회보장기금으로 연구범위를 확대하여 일본 재정의 지속가능성 문제를 검토하고, 이들 분야에서 재정규율이 작동하지 않았던 메커니즘을 해명하여 우리 정부의 재정운영에 대한 정책적 시사점을 도출하였다. 향후 우리나라의 고령화 속도나 저성장 기조의 정착 등을 감안하면 우리나라의 재정 역시 일본의 전철을 밟을 개연성이 충분하다고 보았기 때문이다.

English Abstract: This report analyzes Japanese government’s fiscal discipline mechanism, focusing on the fiscal sustainability of Japan which has re-ignited controversy after the Great East Japan Earthquake in 2011. The research scope covers the fiscal sustainability of central and local governments of Japan as well as that of social security funds. The main purpose of this report is to clarify how the fiscal discipline mechanism has failed in Japan, and to draw policy implications for Korean government’s fiscal management. It is highly probable that the economic and fiscal conditions in Korea will follow in the footsteps of Japan’s case, taking into account its rapid aging speed and onset of low growth rate.

Chapter two reviews fiscal sustainability issues of Japanese central government through key indicators, then introduces the studies dealing with Japanese fiscal sustainability from an economic perspective. We find that fiscal conditions in Japan has not been sustainable since the late 1990s. Nevertheless, Japan is free from fiscal crisis in virtue of its ‘zero-interest rates policy’. At the same time, foreign investors’ lower holding of Japanese government bonds contributes significantly to avoid fiscal crisis in Japan. Second half in chapter two exhibits the importance of tax reform to establish the future fiscal sustainability in Japan. We examine the background of Japanese government putting emphasis on consumption tax reform against individual income or corporate tax yet going through countless political impasses.

Chapter three shows that Japan’s cumulative government debt has derived from the relaxation of fiscal discipline in the government’s budget operation and the relationship between politics and bureaucrats. The relaxation of fiscal discipline in Japan has three major points. First, frequent issue of government bonds does not comply with the Golden Rule in Article four of the Public Finance Act. Second, a large part of various economic measures is organized in supplementary budget, which is free from the budgetary ceiling guidelines set by the Ministry of Finance Japan. Third, this budgetary ceiling guidelines also contributed to encourage budget planning with political considerations since 1990s, especially in public investment. It is apparent that the power game between politicians and bureaucrats limits the budget examination authority of the Ministry of Finance. Second half in chapter three analyzes three examples of how Japanese government intended to promote the establishment of fiscal discipline in the past; Hashimoto cabinet adopting Fiscal Structural Reform Law in 1997, Koizumi cabinet proposing Intergrate Expenditure and Revenue Reform in the early 2000s, and National Fiscal Management Strategies of the ruling Democratic Party of Japan (DPJ) in 2010. We point out the limits of expenditure cut priority and the lack of national consensus on the reform.

Chapter four covers fiscal sustainability and fiscal discipline issues of Japanese local governments. First, we examine the fiscal capacity of local governments through expenditure and revenue indicators. We confirm the main two factors threatening the local fiscal sustainability in Japan are the lack of resources on revenue side and the increase in social security spending on expenditure side. Then, we confirm that the Japanese government has put efforts on the reform of local revenue-sharing system and local tax system to promote the local fiscal sustainability. The reform of local revenue-sharing system is focused on reduction of reliance on temporary local bonds, adjustment of local subsidy through identifying local fiscal demand, pursuing decentralization of local power through the adoption of horizontal fiscal transfer system, and reinforcing accountability of local government’s fiscal management. On the other hand, the reform related to local tax system corrects the distribution of national and local revenue sources. Second half in chapter four examines whether local fiscal consolidation is valid for strengthening fiscal discipline, which was introduced in the wake of Yubari city’s fiscal crisis in 2007. We conclude that the recent improvement in financial indicators suggests positive correlation between the two factors. Finally, we review the local fiscal reform which Abe administration is pursuing and the new system change to mitigate regional tax revenue disparities.

Chapter five describes financial and structural problems threatening the sustainability of Japanese social security system. we find that it is necessary to eliminate disparities inter- and intra-generation in addition to the consumption tax increase and pay cut reform, so that the social security system function properly as a safety net. Next, we analyze the historical evolution of the Japanese social security system and arrive at the following three conclusions. First, the social security system has not been subject to the increase in premium, which resulted in increased fiscal burden. Second, the various reform measures took place until 1985 caused the increase in the fiscal burden and the imbalance between the existing public pension system. Third, the pension reform measures, so called the macroeconomic slide system introduced in 2004, does not function well in deflation, while the announcement of the consumption tax hike in 2012 is insufficient to secure fiscal sustainability in the low birth and aging era. Second half in chapter five identifies the effects and limitations of reform measures that the Japanese government has introduced in order to ensure sustainability of the social security system. Specifically, the public pension and medical insurance system, referred to as the two major axes of the social security system, are reviewed to identify the problems in fiscal management. Although the public pension system repeatedly implemented such measures as increasing insurance premium, cutting coverage, and raising the age of entitlement, it has failed in proactive response to the changes in the aging society. Also, in the public medical insurance system, fine-tuning approaches such as adjustment of finances between the insureds, and measures to reform senior medical insurance system can not guarantee the sustainability of the system.

Note: Downloadable document is in Korean.

Keywords: Fiscal Sustainability, Fiscal Discipline, Japanese government policy, Japanese local governments, Japan

Suggested Citation

Kim, Gyupan and Lee, Hyong-Kun and Kim, Eunji and Suh, Young, 일본 재정의 지속가능성과 재정규율에 관한 연구 (A Study on Japanese Fiscal Sustainability and Fiscal Discipline) (December 30, 2013). KIEP Research Paper No. Policy Analysis-13-23. Available at SSRN: https://ssrn.com/abstract=2437216 or http://dx.doi.org/10.2139/ssrn.2437216

Gyupan Kim (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Hyong-Kun Lee

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Eunji Kim

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Young Suh

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

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