Japanese policy discussions based on accurate financial situations are needed!

Hirokazu Kobayashi

CEO, Green Insight Japan, Inc.

Professor Emeritus and Visiting Professor, University of Shizuoka

I live in a condo adjacent to a JR station with more than 20,000 daily users, and I don’t help but hear the street speeches for the Upper House election. There, stories that make me shake my head are spoken as if they were true, and there are no counterarguments from the audience. I am a scientist, not a politician or a religious figure. Therefore, I have no intention of delving into personal beliefs. However, as a researcher, I would like to organize the data in response to arguments that are not based on evidence.

Question 1: Does the consumption tax fund social security expenses?

The total social security expenses for this fiscal year amount to 140.7 trillion yen, equivalent to US$970 billion. The breakdown is as follows: pensions: 44.4%, medical care: 30.8%, long-term care: 9.9%, children and childcare: 8.5%, and others: 6.4%. The funding sources are as follows: insurance premiums: 59.8% (contributions from insured individuals: 31.6%, contributions from employers: 28.2%), public funds: 40.2% (national taxes: 27.7%, local taxes: 12.5%) (Social Security Benefits and Burdens, Ministry of Health, Labour and Welfare, 2025). On the other hand, 24.9 trillion yen, equivalent to US$172 billion, of this year's consumption tax revenue will be used for social security ("Please Explain Consumption Tax," Ministry of Finance, 2025). This amounts to "24.9 trillion yen / 140.7 trillion yen = 17.7%". What is noteworthy here is that Japan is unique among countries that have a strongly linked consumption tax as a dedicated tax to social security. This is because, when the consumption tax was introduced (1989) and raised (1997, 2014, and 2019), there was strong opposition from the public, so the government explicitly stated that it would be used for social security in order to gain public understanding for the tax increase. Since social security is ascribed to individuals, many countries cover the costs with insurance premiums paid by individuals. In conclusion, the claim that the consumption tax covers all social security expenses is incorrect.

Question 2: Is Japan one of the world's most indebted countries?

In corporate finance, the “profit and loss statement (PL)” is referred to as the “primary balance (PB)” in national finances, and its improvement is emphasized. When measured as “gross debt / nominal GDP,” the smallest country is Canada at 107.7%, while Japan stands at 240.0% (IMF, 2023). Who does Japan owe its debt to? Bank of Japan: 52.0%, banks, etc.: 12.7%, life and non-life insurance companies, etc.: 17.5%, public pensions: 5.9%, pension funds: 3.0%, overseas: 6.4%, households: 1.4%, others: 1.1% (Breakdown of holders of government bonds, etc., Ministry of Finance, 2024). In other words, lending and borrowing are largely confined within the country, resembling a structure similar to family-based lending. The above represents the current state of liabilities, i.e., the debit side (liabilities) of the balance sheet (BS). What about the “assets” side of the BS? According to the Japanese government's “Consolidated Balance Sheet,” the total assets as of the end of the 2023 fiscal year were 1,049 trillion yen, equal to US$7.23 trillion (Summary of Consolidated Financial Statements for Fiscal Year 2023, Ministry of Finance). Additionally, the assets of the Bank of Japan, which can be considered a subsidiary of the government, were reported as 756.4 trillion yen, US$5.22 trillion, as of the end of the 2023 fiscal year (Financial Statements for the 139th Fiscal Year, Bank of Japan). On the other hand, total liabilities amount to 1,474 trillion yen, equivalent to US$10.2 trillion (as of fiscal year 2023), with assets and liabilities roughly balanced. Japan's net foreign assets (government, corporations, and individuals) are reported to be 1,338 trillion yen, equivalent to US$9.23 trillion (International Investment Position of Japan, Ministry of Finance, 2022). Japan has maintained the title of the world's largest “net asset holder” for 31 consecutive years (Japan Times, May 27, 2022). In other words, Japan as a whole can be described as the world's largest creditor nation.

When did Japan become a PB-focused (austerity-driven) country? In 1997, under the Hashimoto administration, the “Fiscal Structural Reform Law” was enacted, establishing the Public Finance surplus as the most important indicator of fiscal soundness. Subsequently, under the Koizumi administration (2001–2006), “Painful Reforms” were strongly promoted, including budget cuts and achieving a PB surplus. In 2006, the “Fiscal Consolidation Goals” were established, solidifying PB supremacy as an explicitly stated national objective. From this point onward, fiscal management that took into account the nation's balance sheet (total assets and liabilities) was virtually no longer discussed. Since 1997, Japan has been mired in a negative economic spiral, with its real GDP growth rate ranking last among the 38 advanced economies. Policy discussions based on such situations are urgently needed.

The operation of a nation involves revenue and expenditure, which is similar to the management of a company. Companies are exposed to competition from other companies, so they invest funds in technological development and work efficiency to gain a competitive edge. On the other hand, nations are also exposed to international competition in the export of products. In a capitalist society, to pursue the welfare of the people, we cannot avoid strengthening both global competitiveness and security.