Confusion over British economic policy Lessons learned for Japan at 17:25 on October 27

On the 20th of this month, Prime Minister Truss of the United Kingdom was forced to resign at an unusual speed, just one and a half months in office.

The big tax cut, which was announced as a flagship policy, caused confusion in the financial market, and the market and the public were forced to say "no".

Experts point out that "Japan is by no means on the other side of the fire," and sound the alarm about Japan's future fiscal and monetary policies.

What can Japan learn from the turmoil in England?

(Economics Department reporter Akihiro Shiraishi)

Great interest in Japan too, suddenly becoming a theme at the fiscal council

The Fiscal System Subcommittee of the Fiscal System Council, an advisory body to the Minister of Finance, was held on October 13.

The main themes of the day were energy, the environment, and local government finances, but in addition to the ``General Fiscal Policy'' that was discussed at the previous meeting in September, it was decided to hurriedly discuss economic policy in the UK. .

In the materials titled "Fiscal Policy (Supplementary)" distributed by the Ministry of Finance Secretariat, various data, outlines of policies, remarks of concerned parties, etc. etc., were collected.

It is unusual for the fiscal council, which is involved in next year's budget bill, to take up economic policies of other countries as the theme.

Why was the British case suddenly taken up?

According to people familiar with the matter, members of the committee said that the confusion over British policy should be addressed.

Of course, the Ministry of Finance, which serves as the secretariat, must have wanted to warn against fiscal expansionary economic policies that are not backed by financial resources.

At the beginning of the fiscal deliberation, a person in charge of the Ministry of Finance gave an explanation based on materials.

Members of the committee said, "Japan must also take a stand on fiscal management going forward," and, "The United Kingdom, like Japan, is a country that issues government bonds denominated in its own currency, and this case is a lesson that Japan should learn. It is said that there was an opinion that

what happened in england

What are the lessons we should learn?

In order to think about it, I would like to look back on what happened in England.

The root of the confusion was the economic policy “Growth plan 2022” announced by the Truss administration on the 23rd of last month.

Let's take a look inside.

The pillar of the policy is a large-scale tax reduction package worth 45 billion pounds (approximately 7.6 trillion yen in Japanese yen) over five years.

The basic income tax rate will be reduced by 1%, and the maximum tax rate will also be reduced from 45% to 40%.

In addition, it is a policy to give preferential treatment to the wealthy and companies, such as withdrawing the corporate tax rate hike (from 19% to 25%).

In addition, it was also announced that a huge amount of government funding of approximately 60 billion pounds (approximately 10.2 trillion yen in Japanese yen) will be invested over the six months from October as a countermeasure against soaring energy prices.

Prime Minister Truss indicated a policy to cover the lack of financial resources by issuing additional government bonds, but the market questioned the fiscal expansion measures without financial resources, and the yield on British government bonds soared (the price of government bonds fell).

It rose 1% in just four days.

The currency, the pound, also plummeted, hitting a new low since the exchange rate shifted to a floating exchange rate system in 1972.

Behind the market's "no" statement is a contradiction in policy management: the central bank, the Bank of England, is tightening monetary policy to curb inflation, while the government is launching fiscal expansionary policies.

The Bank of England decided to raise interest rates seven times in a row at its monetary policy meeting held on September 22nd, and further tightened monetary policy, stating, "If we see more sustained inflationary pressures, we will respond strongly as necessary." I was sending a message that it was possible.

The fact that the Truss administration announced large-scale tax cuts and other measures on the following day, the 23rd, also increased the distrust of the market.

In response to the market turmoil, the Bank of England implemented the purchase of government bonds as an emergency response.

If the value of government bonds pledged to financial institutions as collateral by pension funds declined, they would be forced to sell assets to pledge additional collateral, which could plunge the market into chaos.

The International Monetary Fund (IMF) said on September 27, ``Given the mounting inflationary pressures in many countries, including the United Kingdom, it is important that fiscal policy does not conflict with monetary policy. "We do not recommend loose-fitting fiscal measures. We urge the UK to provide more targeted support and reconsider tax measures that favor high incomes," he said in an unusual warning to the UK.

Jun Suzuki, an economist at Daiwa Institute of Research, analyzes the stray drama of the Truss administration as follows.

Executive Officer Jun Suzuki, Daiwa Institute of Research

“Despite the fact that the Truss administration has come up with an economic policy accompanied by large-scale tax cuts, it has lost the trust of the market by not specifying its financial sources. In terms of measures, the market questioned the sustainability of the UK's fiscal policy and gave it a negative evaluation because it did not combine both revenues and expenditures into a package. The market didn't appreciate it at all because it became clear that it was a policy that was launched in the absence of any coordination."

what to learn from england

So what are the lessons that Japan should learn?

First, there is the need to maintain consistency in the policy mix (combination of policy instruments) of the government and the Bank of Japan.

Regarding the recent policy responses of the government and the Bank of Japan, it seems contradictory that the Bank of Japan's continued large-scale monetary easing has contributed to the depreciation of the yen, and that the government's intervention in the foreign exchange market has suppressed it. There are also indications that there is no such thing.

Regarding this, Finance Minister Suzuki said, ``While monetary easing aims at a stable rise in prices, market intervention is conducted to deal with excessive exchange rate fluctuations. to object.

It is important for the government and the BOJ to clearly explain their respective roles and the consistency of their policy mix so as not to arouse suspicion in the market.

And the spread policy without financial backing will be abandoned by the market.

Losing market confidence can quickly lead to a crisis, putting people's livelihoods and property at risk.

Executive Officer Jun Suzuki of Daiwa Institute of Research warns that postponing the issue of fiscal management will heighten uncertainty and could lead to a loss of confidence in the market.

Executive Officer Suzuki, Daiwa Institute of Research

“Japan has repeatedly postponed fiscal reforms, and there is a risk that investors and others will see the future of Japan as highly uncertain. Otherwise, the government's growth strategy will lose credibility."

"In addition, the Bank of Japan's unconventional monetary easing has been prolonged and financial functions have declined, delaying structural reforms in the Japanese economy and loosening fiscal discipline. We have a structural problem of being connected.We don't know what will trigger market turmoil.What happened in the UK is not a good example to look at from the other side and think it has nothing to do with us."

On October 13, the Fiscal System Council's Fiscal System Subcommittee discussed the case of the United Kingdom.

Acting Chairman Hiroya Masuda said the following after the meeting.

Deputy Chairman Masuda

: “The background circumstances are different between Japan and the UK. It is not possible to simply assume that what happened in the UK means that Japan will also be affected. Confidence has declined and the market has fluctuated, so Japan needs to respond firmly so that confidence in its fiscal management does not decline."

Finance Minister Suzuki also spoke about the lessons that Japan should learn from Britain.

Finance Minister Suzuki

: Fiscal credibility is extremely important. As for the budget, we will have to create a budget for the maintenance of defense capabilities, child policy, GX (Green Transformation), etc., which are in great financial demand from now on. We have to keep fiscal discipline in mind so that Japan's finances don't lose credibility in the market.

As a stone from another mountain

While covering the economic turmoil in the UK, I heard that the UK's fiscal and monetary policies were quickly adjusted as a result of the market functioning normally.

He said that the company should be commended for its quick course correction in response to the market's warning.

On the other hand, in Japan, as a result of the Bank of Japan's continued unconventional monetary easing, it has been pointed out that interest rates no longer play their role as market signals.

In the stock market, it is said that it is difficult to read a company's true strength from its stock price because the Bank of Japan buys a large amount of ETFs and supports them.

The government will compile a large-scale comprehensive economic package at the end of October, focusing on priority areas such as dealing with high prices and the weak yen, and structural wage increases.

In addition, the initial budget for the end of the year is expected to significantly increase defense spending.

Are there financial resources there?

Has the sustainability of the policy been ensured?

When thinking about the future of the Japanese economy, I would like to see the UK's failures as another obstacle, and not to overlook market signals.

Economics Department Reporter

Meidai Shiraishi

Joined in 2015

After working at the Matsue Bureau, he is currently

in charge of the Financial Services Agency and the Bank of Japan, and is in charge of the Ministry of Finance.