Is the Trend of Reduced Government in Japan Reversing?

Today's first estimate of Japan's GDP during the third quarter was at first glance better than analysts had expected with growth being 1.7% at an annual rate compared to the previous quarter, compared to the expected 1.2%. At a terms of trade adjusted basis, growth was only 1.1% however. On the other hand, the fast growth in the investment income surplus from offshore means that national income grew 1.9% on a terms of trade adjusted basis. And since Japan have zero population growth, this means that all of these growth numbers are equivalent to more than a percentage point higher growth in the U.S.

One worrisome item is the fact that growth in government demand this quarter seemed to be the main driving force behind economic growth . In recent years, Japanese politicians have tried to reduce the sky high budget deficit through cutting the wasteful government "investments" that previous governments have tried to prop up the economy with in a Keynesian manner. But this quarter government spending rose relative both GDP and national income. Let's hope for Japan's sake that this is merely a abberation and not the reversal of the trend of reduced burden of government. Because of its extremely large (6% of GDP) budget deficit, Japan certainly cannot afford to increase it further. And tax increases would discourage productive behavior.

Prime Minister Koizumi promised during the latest election campaign that he would reduce the burden of government, so probably this was indeed merely a abberation. However, we cannot be sure as politicians can never be trusted to keep their election promises. Remember, Franklin D. Roosevelt promised in the 1932 presidential election campaign to cut government spending......