TOKYO – In the fourth century, Japan’s emperor looked out from a small mountain near his palace and noticed that something was missing: smoke rising from people’s kitchens. While there were some faint trails here and there, it was clear that people were facing such harsh economic conditions that they could barely purchase any food to cook. Appalled at the circumstances of the Japanese people, who were largely peasants, the emperor decided to suspend taxation.
Three years later, the palace gates were in disrepair and the stars shone through leaks in the roof. But a glimpse from the same mountain revealed steady plumes of smoke rising from the peasants’ huts. The tax moratorium had worked. The people were so grateful to the emperor – who became known as Nintoku (Emperor with Virtue and Benevolence) – that they volunteered to repair his palace.
Almost two millennia later, the Japanese people are, again, under economic pressure. A steep hike in the consumption tax in 2014, together with another hike expected in the near future, has undermined household spending. As in the Nintoku story, it is the wealth of the people – not that of the government – that dictates consumption.
Of course, the wealth of the government does play a role in economic performance. But excessive concern about government’s solvency can cause the private sector to be reluctant to spend. That is what has happened in Japan.