Tax Cut Funding: Not “As a Last Resort,” but “By Issuing Bonds”

I have repeatedly argued that the government must evaluate the current state of the economy and determine its actions based on that assessment. This should be common sense. Yet, since the Kishida administration, this basic step has been ignored, leaving Japan’s economic policy direction—both fiscal and monetary—completely adrift.

Prime Minister Ishiba reportedly hinted at a consumption tax cut, only to back down when his inner circle objected. Why couldn’t he push back? He should have said: “Citizens are suffering from rising prices. Simply saying ‘no’ to a tax cut is irresponsible. I am the one in charge; if you don’t have a better alternative, remain silent.”

The Flaw in the Opposition’s Logic

However, the tax cut proposals from the Constitutional Democratic Party (CDP) are equally flawed. Their plan to limit the consumption tax cut to a single year makes it no different from the LDP’s one-off cash handouts. The point is that as long as consumption tax is hindering economic growth, there is no need to collect it. Only Ministry of Finance bureaucrats obsess over whether it’s for one year or not—their view of money is entirely misguided. Furthermore, their talk of using “reserve funds” or the “Foreign Exchange Fund Special Account” as funding sources is a distraction. The only true source is the issuance of government bonds.

Why It Must Be Government Bonds

Why do I say this? As discussed in my blog on Credit Creation, it is precisely the issuance of government bonds that increases the amount of money in circulation. When it comes to funding economic measures, issuing bonds should not be seen as a “regrettable necessity” (yamu-nashi); it must be understood as the essential requirement (nakereba-naranai).

I have stated this before and will not repeat it in detail here, but government bond issuance is not “debt” in the practical sense. If the Bank of Japan purchases the bonds, no net interest or principal payments occur for the government.

DPP leader Yuichiro Tamaki has stated that government bonds should fund consumption tax cuts. He is absolutely correct. While I haven’t researched every detail, I believe Reiwa Shinsengumi, Sanseito, and the Conservative Party of Japan are likely saying the same.

A Political Footnote

While the DPP is on the right track regarding funding, they are facing criticism from conservatives for nominating figures like Shiori Yamao for the House of Councillors election. It remains to be seen how this will impact their momentum.