The UK can’t afford free university tuition – but Japan can. Here’s how

In my editor’s letter this week in MoneyWeek magazine, I mentioned that fiscal stimulus in Japan was taking an interesting turn.

It is. Shinzo Abe has come over a little Theresa May with some anti corporate suggestions: he’d quite like to force companies to raise wages whether they want to or not, and he is keen on new taxes on companies that hoard cash (most companies…). But, says GAvKal Research, he might also have a “bit of a gamechanger up his sleeve”.

His government is floating the idea that it might be possible to dramatically boost domestic consumption in Japan by offering free higher education for all 18-22 year olds and by embedding the right to it into the constitution.

This makes some sense (if you assume that boosting consumption is a worthy goal). Japan’s overall saving rate has fallen as its population has aged and has started to run down savings. But among the young, the saving rate remains very high: 30-39 year olds save an astonishing 34% of their incomes and there is some evidence that this low propensity to consume “stems in part from a need to build a nest egg to fund their children’s education.”

So making tertiary education free would not only be a good thing in itself (it is nice to think that developed democracies can educate everyone up to it to degree level) but would kick-start the consumption and hence growth and inflation Japan would like.

It might even persuade couples to try harder to navigate the endless problems of having children in Japan (childcare is hard to access and the older you get the higher the health care costs get) and start having the 2.4 children they say they want or the 2.1 the economy needs rather than the 1.7 they currently knock out. Fiscal stimulus on steroids.

You may, however, have spotted a problem. We can’t afford free university education in the UK (the Scots pretend we can, but it isn’t true). So how could the Japanese, given that they have an even higher ratio of debt to GDP than we do (some feat) and that the total cost would amount to some ¥5trn or 1% of GDP?

The answer is that Japan is further down the path of debt monetisation than the rest of us and clearly has every intention of continuing to be a world leader here, so there would be no real effort to actually finance the policy in traditional terms (out of tax revenue for example). Instead, the state would issue education bonds of some kind or another as a “permanent funding source” says Gavkal. The Bank of Japan would then buy the lot every year as part of its QE programme and Japan’s use of “direct monetary financing to manage it its fiscal and social obligations” will have moved to the next level. Job done.