This is the year that Japan starts taking the cure for its recent addiction to large budget deficits. The pains of withdrawal are already widely evident.
Austerity warnings from the minister of finance are heralding a tight budget for the fiscal year beginning next April. Domestic spending will be pinched to the bone and will show the lowers increases in more than two decades.
Japan's deficits have been increasing since 1965, erratically at first but steadily and dramatically since 1971. They reached an alarming peak last year for a country that had prided itself on conservative fiscal management.
By most measurements, the deficits are comparable to those in the American budgets and small by comparison with those tolerated by several European governments. But they have gone too far to satisfy the administration of Prime Minister Masayoshi Ohira and his economic managers, particularly those in the powerful ministry of finance.
"No matter how the measure is taken, the Japanese (government's) financial situation has deteriorated substantially over the past few years," declared the finance ministry's assistant vice minister for international affairs, Toyoo Gyoten.
Ohira had hoped to overcome the deficit-financing trend by introducing this year a Japanese equivalent of the European value added tax. But when he raised that issue in the general elections last fall, it was met with a loud protest from thousands of business community supporters of his Liberal Democratic party. That clash was regarded widely as the main reason Ohira's party did so poorly in the lower house election, a debacle that almost cost him his job.
For two decades after the end of World War II, Japan was a pay-as-you-go nation fiscally. The ideal of balanced budgets was imposed by Joseph Dodge, the American entrepeneur who became a kind of economic czar here during the days of the allied military occupation.
His admonitions were followed religiously until 1965 when, in a sudden reversal of policy, Japan began issuing nation bonds for public works construction projects.It was an abrupt about-face, but it was justified by conservative fiscal managers with the argument that the resulting dams, bridges, highways and the like were tangible assets. Besides, the people were loudly demanding the bonds and the issurance of them proved to be good politics.
Japan adhered to the idea of restricting bonds to public works purposes until the mid-1970s, when it adopted the notion, previously considered sinful, that public spending should be used to stimulate the economy. Japan, after 1973, had tumbled deeply into a recession. Even big business called for a degree of pump-priming, and the conservative administrations complied. For the first time, Japan began issuing bonds to finance current expenditures.
Then Japan dropped even further into deficits for a totally different reason. In 1976, it was under extreme foreign pressure because of its large trade surpluses the United States and other countries began accusing Japan of "exporting a recession" by its policy of unrestricted exports of steel, automobiles and other products.
To turn that wave around, Japan was advised -- principally by the U.S. -- to stimulate its domestic economy even more to create buying power that would suck in imports from the other countries.
Japan did just that and it worked. Imports from abroad soared last year and Japan's huge trade surpluses turned into trade deficits.
But the effect on the Japanese budget of all these changes was enormous. Trillions of yen worth of national bonds were issued and the cost of servicing that debt began to soar. When the decade of the 1970s began, the amount of national bonds outstanding was only 4.2 per cent. It increased during the decade nearly 10 times.The government estimates that when the current fiscal year ends next March, national bonds will amount to nearly 40 per cent of the total budget.
The total debt, including national bonds, local government bonds and other debt guarantees outstanding, now equals about 30 per cent of Japan's large gross national product. That is about the same ratio as in the United States, according to an analysis by the ministry of finance, but it is considerably below the 44 percent ratio in Great Britain.
Ohira is acting this year to pare down that ratio out of a conviction that large deficits will lead to an inflationary spiral. So far that has not happened. Japan's rate of inflation last year was one of the world's lowest. But the finance ministry's Gyoten says that untrimmed deficits are bound to create an "inflationary psychology" in Japan.
One reason that deficits have had no great inflationary effect so far is that the national bonds are always absorbed by private savings and do not -- as in some other countries -- increase the total money supply, Gyoten explained.
Gyoten also points out that the government's budgets have become annually less flexible because of the steadily increasing shares necessary to service the growing debt. When the decade began, the ratio of debt service to total general expenditures was only 3.4 percent. Now it is more than 10 percent.
Gyoten believes that the mounting debt could also create a serious social problem: Who is to pay for it? Much of the debt was initially borrowed for such specific purposes as subsidizing farmers or increasing socail security benefits to the elderly.
The finance ministry's plan is to issue a trillion yen less in national bonds this year, to reduce the ratio of bonds to budget to 33 1/2 per cent from the current peak of 39.6 per cent. With no tax increases possible, that means cutting expenditures, largely in the domestic welfare areas.
By 1983, if the plan works, Japan no longer will be issuing bonds to pay current expenses and thereafter bonds will be used only to pay for public works.
The final budget sent to parlilament on Dec. 29 showed the effects of Ohira's effort to hold expenses down. General account expenditures would be increased by only 10.3 percent, making it the lowest rate of increase in 21 years. Ohira tried to pare spending by cutting even such minor items as free textbooks in public schools but was overruled at the last minute by his ministers. Even the increase in spending on defense is held to a modest 6 1/2 percent, compared with the 10.2 percent increase proposed a year ago.