If only all advanced countries could grow as fast as Japan. Unfortunately, Japan itself is unlikely to grow as fast as Japan for very much longer. First-quarter growth of 1 per cent, an annualised rate of 4.1 per cent, looks like a flash in the pan. Subsidies to eco-cars and the boost from earthquake reconstruction will gradually fade. Weak European demand and higher electricity prices – the result of a post-tsunami nuclear shutdown – will bite harder. Add to this a drag on activity from ageing and a rising social security bill, and Japan cannot afford complacency.
Above all, Japan needs to raise its potential growth rate, both in real and nominal terms. Nominal growth requires modest inflation, something the country has not had for 15 years. In that respect the Bank of Japan’s adoption, albeit reluctantly, of an inflation “goal” of 1 per cent is a step forward. The bank needs to be more imaginative in the instruments it deploys to meet that goal – and should consider raising it to 2 per cent in due course. Nominal growth of 3 or 4 per cent sustained over several years would certainly help to erode the public debt stock as a share of gross domestic product, now a worrying 200 per cent.
Japan, of course, is not Greece. The world’s second biggest bond market, 95 per cent of which is held by domestic investors, is much less prone to capital flight. But the government, more than half of whose spending is financed by borrowing, needs a medium-term plan to put the country on a fiscally more sustainable footing. Prime minister Yoshihiko Noda’s bill to raise the consumption tax – from 5 per cent now to 8 per cent in 2014 and 10 per cent in 2015 – is a good start. If the cost of getting the bill passed is to lose his premiership, he should pay it.