Aurelia Butler

Japanese investors have piled into foreign debt this year — but analysts have warned that the revival in demand from one of the cornerstones of the US Treasury market is unlikely to last.Data from Japan’s ministry of finance reported this week showed that investors bought ¥4.1tn ($30bn) of foreign debt in February, the largest total since September 2021. That follows net buying of ¥1.1tn in January, and marks a pause in the dramatic selling of foreign debt in 2022.The big rise in yields over the past year in markets outside Japan is theoretically a big draw for the country’s banks, insurers and pension funds, who face rock-bottom returns at home. However, the high cost of hedging foreign bond holdings against swings in the yen exchange rate — which most Japanese investors prefer to do — wipes out those extra returns and was likely to mean the current buying spree is shortlived, analysts said.“The cost of hedging is already prohibitive and with current expectations about the [US Federal Reserve’s] path, is set to become more prohibitive,” said Brad Setser, a senior fellow at the Council on Foreign Relations. “You’re not going to get the sustained demand from Japan that you got a few years ago.”Japan has been the biggest foreign owner of US Treasuries for years, as ultra-dovish monetary policy domestically has pushed investors outside the country’s borders in search of returns. Japanese investors also hold substantial quantities of eurozone government debt, particularly French bonds.However, they dumped large quantities of foreign bonds — of which US debt forms a sizeable proportion — during last year’s historic global fixed-income rout.Steep interest rate rises from the Fed and other big central banks pushed the yen to a 32-year low in October, and raised the cost for Japanese investors of hedging against currency moves, which depends largely on the rate gap between Japan and elsewhere. While the yen rose at the end of last year, it has weakened 4.3 per cent so far in 2023.The cost could be set to increase further after Fed chair Jay Powell said this week that the strength of US economic data may lead to the central bank re-accelerating its efforts to lift borrowing costs, having slowed rate rises earlier this year. The European Central Bank is also expected to continue to lift rates this year following a run of strong economic data.Japanese buying of foreign bonds “ultimately comes down to the hedging costs, which is aligned with the fed funds rate. The cost of funding will dictate foreign flows,” said George Goncalves, head of US macro strategy at MUFG. “The monthly or weekly flows are not always going to be smooth and logical and reflect the hedging costs. But you will see those trends over the longer term.”Some of the buying in recent weeks may be from Japanese institutions that have more capacity for making unhedged bets, such as pension funds. After the big sell-off last year, some institutional investors may be very underweight foreign debt, so “there is capacity to buy unhedged at the moment”, said Edward Al-Hussainy, senior currency and rates analyst at Columbia Threadneedle.

However the riskiness of unhedged holdings of dollar-denominated debt, which can tumble in value if the yen rebounds against the US currency, is likely to limit the scope for further demand.A prospective sea change in Japanese monetary policy could eventually help to bring hedging costs down. Though interest rates remain below zero, the reign of Bank of Japan governor Haruhiko Kuroda — the architect of the country’s years of ultra-loose policy — will end after the central bank’s meeting on Friday.His successor, Kazuo Ueda, has hinted that he may relax or even ditch the BoJ’s policy of pinning 10-year bond yields close to zero, a move that some investors would see as a prelude to eventual rises in interest rates.But tighter monetary policy in Japan could undermine investors’ rationale for looking at overseas bonds in the first place.“If the level of yields in Japan starts to go up, suddenly that will make Japanese yield levels more attractive, which might run the risk of Japanese investors asking why they are investing abroad,” said Torsten Slok, chief economist at Apollo Global Management. “That is a major risk to international fixed-income markets.” More

The US Federal Reserve is hurtling towards one of the toughest calls of its monetary tightening campaign as it decides whether to switch back to more aggressive rate rises at a time of acute economic uncertainty. This week, chair Jay Powell warned the central bank might have to return to half-point rate rises at the conclusion of its next meeting on March 22. But he said the final decision hinged on a series of crucial forthcoming data releases, which will be published either during or just before a “blackout” period when the Fed is all but forbidden from communicating publicly. That means the Fed might not only be forced to make a significant departure from the path Powell laid out just over a month ago, when the central bank called time on a string of “jumbo” rate rises and opted for a more typical quarter-point cadence. It also means it has a short window to signal its thinking to investors. “They’re getting spooked, and why wouldn’t they be?” said Derek Tang, an economist at research firm LH Meyer.“It’s their reputation at stake now and reputation is something that is very hard to earn back once you lose it,” added Tang, who predicts the Fed will opt for a half-point rate rise. At the conclusion of the Fed’s most recent meeting earlier this month, Powell said the “disinflationary process” was under way, prompting a relief rally in markets and leaving the impression the US central bank had finally turned a corner in its fight against soaring prices. However, since then a surge in job creation coupled with the hotter-than-expected inflation and spending data has complicated the Fed’s calculus. Powell has been at pains to point out that the Fed has not yet decided on a half-point rate rise over a smaller increment. “We’re not on a preset path,” he said during congressional testimony this week. “We will be guided by the incoming data and the evolving outlook.”Whether the Fed chooses to go bigger or smaller depends in large part on two data releases that officials are waiting for with bated breath: the next jobs report on Friday and fresh consumer price data on Tuesday. Those releases will help the Fed decide whether the hotter-than-expected releases last month were “fluky”, perhaps because of unseasonably warm weather at the start of the year, according to William English, a former director of the Fed’s division of monetary affairs.“If February looks bad and confirms some of what we saw in January, then I think they probably do conclude they have further to go than they thought,” said English, who is now at Yale University. In that case, a half-point rise “might well feel like a safe bet to get back on the path that they need”, he added.Another complicating factor for the Fed is the jobs report will be released just hours before it enters the blackout in the early hours of Saturday morning. After that, officials are forbidden from making public statements that are heavily parsed by investors for signs of which way the Fed is leaning. Meanwhile, the inflation number will be released in the middle of the quiet period, along with data on retail sales and manufacturing inflation.Futures markets now suggest odds of roughly 80 per cent that the Fed will opt for a half-point rate rise, according to the CME Group.Economists at Citigroup warn that if the Fed blinks and sticks with a quarter-point rate rise, it could result in an “unhelpfully large easing of financial conditions”.

Tang from LH Meyer also warned that the economic data will not be “ambiguous enough” to allow the Fed to stick with a quarter-point increase. For Tiffany Wilding, North American economist at Pimco, payrolls growth of about 300,000 on Friday would clear the path for the more aggressive option.The prospect of a half-point rate rise has also upended expectations about how far the Fed will lift its benchmark rate this year. It has already raised it to just below 4.75 per cent. Powell this week said the “ultimate level of interest rates is likely to be higher than previously anticipated”.In December, most officials saw the fed funds rate topping out somewhere between 5 per cent and 5.25 per cent. Fresh projections will be released alongside the rate decision this month, with many economists now expecting those forecasts to be revised upwards by at least half a percentage point to 5.5 per cent to 5.75 per cent. “What gets him to stop? The economy has to shift pretty sharply,” said Harris of Powell. “We need to see the job market cool off dramatically, with job growth down to zero and the unemployment rate inching up.” More

Being on the receiving end of coercive trade bullying from China isn’t much fun for exporters. Beijing has multiple ways to let a trading partner know the folly of their inconvenient political views — including sudden new bureaucratic obstacles and conveniently-timed tariffs against allegedly dumped imports. The most high-profile recent targets are Australia, after it called for an investigation into the origins of Covid in 2020, and Lithuania, which allowed Taiwan to open a “representative office” in Vilnius, its capital, in 2021. Using formal means such as tariffs and informal ones like ports simply turning away cargo ships, China severely restricted some of Australia’s main goods exports, including coal, wine and barley. Lithuania — and foreign companies linked to it by supply chains — suddenly found it almost impossible to get clearance for exports to China.Canberra and Vilnius had two main options for responding. One was traditional trade policy: diplomatic manoeuvring, litigation, retaliation. The other was for their exporters to roll with the punch and find markets elsewhere. In recent months it’s become clear the latter has been so successful that the former seems almost an afterthought. A proverb cited by George Herbert, a 17th-century English poet, puts it neatly: living well is the best revenge.In theory, Australia should have suffered heavily. Its commodities feed China’s factories and its wine and rock lobsters sustain Chinese consumers. But Australian exporters have found gaps in the trade barriers and new markets elsewhere. With few other sources of supply, China exempted Australian iron ore from the restrictions. Lobsters were smuggled through Hong Kong. Australian wine producers shifted their attention to the US market.Australia did bring cases over tariffs on wine and barley against China to the World Trade Organization in 2021. It also signalled geopolitical autonomy by signing security pacts with the US and a trade deal with India. But those WTO cases are still unresolved, and Australian exporters have clearly won the diplomatic battle for their government in the meantime. Beijing has softened its aggression. In December, Penny Wong became the first Australian foreign minister for three years to make an official trip to China. By last month, it became clear that Australian coal was again being allowed through Chinese ports. Beijing hasn’t done much better pushing around Lithuania, the small Baltic EU member state. The EU has pursued official channels on Lithuania’s behalf, giving it a loan and last year also opening a WTO case. But given the tiny amounts of trade involved, any proportionate retaliation will barely leave a mark on Chinese exports. The EU is also creating a potentially very powerful unilateral legal “anti-coercion instrument” allowing it to impose a broad range of retaliatory measures, but it isn’t yet in force.In the meantime Lithuania, which had sold very little of the minerals, manufactured goods and chemicals it exports to China, has increased sales elsewhere. For a while it looked as if German companies locked into Lithuanian supply chains would pressure Vilnius to back down. But rather than become collateral damage, those businesses seem to have rejigged their supply networks and Lithuania retains a free hand on foreign policy.Exports have been strong not just in the country’s traditional destinations such as Germany and the US, but also Indo-Pacific economies, including Taiwan (which has also helped out with loans and co-operation on semiconductor manufacture), Korea, Singapore and Australia, which opened a trade office in Vilnius in February.Politically, far from being intimidated, Lithuania has been handed an excellent public relations opportunity. As the extent of its trade recovery and diversification became clearer last year — even before the EU’s WTO case had properly got going — the foreign ministry gleefully fired out volleys of enthusiastic missives about its new geoeconomic pals.This is not to say that WTO litigation or other diplomatic action is pointless. EU officials, reasonably enough, say a case can establish precedent that even the murky forms of coercion China uses are subject to WTO rules. There’s an important principle at stake: EU institutions defending the rule of law. But litigation is more about setting rules for the future than forcing China to back down now.Not every country can do what flexible advanced economies like Lithuania and Australia have managed. Countries whose companies have many operations in China or are themselves dependent on Chinese inward investment are more vulnerable to coercion. It’s much slower and more expensive to move factories than export customers.But Canberra and Vilnius have shown that China is far from invincible. Beijing has lost propaganda battles at either end of the planet and might now be careful about starting more. The Mercator Institute for China Studies (Merics), a Berlin-based think-tank, produces an indicator of recorded Chinese economic coercion — many undoubtedly go unreported — which suggests they rose sharply in the years to 2019 but then dropped off as China adopted a more persuasive diplomatic tone, certainly in Europe.For Chinese trading partners, the lessons are clear. By all means make diplomatic complaints and bring WTO cases against Beijing, but the first step is to find more reliable [email protected] More

France is almost at a standstill over modest pension reforms. Germany is grappling with widespread labour shortages. All over Europe’s biggest economies, an ageing population is shrinking the workforce.The issues are legion but across the continent, one policy could help businesses and governments alike ease the problems of a tight labour market: boosting women’s employment.Within the EU, only 68 per cent of women aged between 20 and 64 are in work – 10 percentage points less than the proportion for men, according to OECD data. The UK figures are similar. The economic benefits of closing the gap are clear. The European Commission estimates it costs the EU €370bn a year. The OECD thinks Germany would gain 9 per cent of gross domestic product if as many women were employed as men, while Italy’s economy could expand by as much as 14 per cent. Yet childcare remains expensive and in short supply, while tax systems in certain member states make it advantageous for women to stay home. Despite some progress, gender biases remain common — particularly in parts of eastern and southern Europe. With Europe’s working age population already shrinking, unemployment at record lows and strong wage growth sparking concern that high inflation will linger, the case for governments to act is becoming ever more urgent.“European countries have much to gain from untapping the potential of women’s equitable participation in the labour market,” said Chidi King, chief of the International Labour Organization’s gender, equality, diversity and inclusion branch. “It would provide a much-needed boost for economies facing multiple crises, including population ageing, labour shortages, cost-of-living and geopolitical crises.” Willem Adema, senior economist in the OECD Social Policy Division, argues that countries must not only raise retirement ages but also bring unrepresented groups into the labour force. “Women are one of those groups,” he said.Boosting the participation of women has the added benefit of boosting productivity. “Younger women are much more likely, on average to have achieved a high level of educational attainment compared to young men,” said Adema.

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Europe is already the world’s oldest continent and UN data shows that by 2040, there will be nearly 50mn fewer people of working age. At the same time there will be 45mn more people aged over 65. That means fewer workers will need to generate more tax revenues to pay for rising health and pension costs. There has been an improvement in recent years. In Germany, for instance, it is no longer frowned upon for women with young children to go to work. But, even there and in the UK — where women’s employment rates have also increased markedly — there is still a 7 percentage point gap. Katharina Wrohlich, professor of public finance, gender and family economics at the University of Potsdam, noted that almost half of German women were employed part-time. Wrohlich said this was partly due to Germany’s taxation system, in which couples are taxed jointly, and a shortage of childcare facilities with adequate opening hours. Most agree that a lack of adequate childcare provision is an important reason for the gap. “Better access to high quality, and cheaper, daycare is an important factor in boosting female participation rates,” said Claudia Olivetti, professor of economics at Dartmouth College. Half of families in the UK with both parents at work said they struggled to find term-time childcare that fitted in with their working hours, according to a government survey. In the EU, 18 per cent of women of working age who are not looking for jobs say the reason is that they are looking after children. The proportion for men was only 2 per cent. However, others stress that closing the gap will involve more than childcare provision alone. “Policies need to prioritise breaking down deeply ingrained structural barriers and discrimination in the world of work,” said King. “Governments must address the unequal sharing of care responsibilities, unequal pay for work of equal value, gender-based violence and harassment and outdated social and cultural norms.” More

The war in Ukraine and the pandemic have together achieved what decades of Japanese central bankers have struggled to do: boost prices in a stagnant economy.Asked if he had felt the impact of inflation during a recent parliamentary hearing, incoming Bank of Japan governor Kazuo Ueda said he could no longer buy a lunchbox at his university convenience store with a single ¥500 ($3.70) coin.The one-coin meals have long been a symbol of Japan’s struggle with deflation, but ¥500 is no longer enough to buy a Tomica toy car or a tempura bowl in Tokyo. Prices of some chocolate bars and sukiyaki sauce are rising for the first time, while subway fares will increase next month for the first time in nearly 30 years.Prices in Asia’s most advanced economy have risen at their fastest rate in four decades, a challenge for Ueda as he navigates monetary policy, as well as for capital markets used to the Bank of Japan’s bond buying, and a shock for consumers used to long-term deflation.Fuku, a 64-year-old pensioner in Tokyo, said she now only buys goods on sale. “My husband and I are now jobless and without any income, so we are worried about the future if prices continue to rise,” she said.

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Japan’s core consumer price index has surpassed the Bank of Japan’s target for nine straight months, rising at a rate of 4.2 per cent in January. While Ueda says inflation is likely to have peaked, as government subsidies for electricity and gas kick in, many remain anxious about further price increases.In a sign that inflation could last longer than expected, consumer prices, excluding volatile food and energy prices, rose at a rate of 3.2 per cent in January, the fastest pace since 1990.Three everyday items tell the story of inflation in Japan, its impact on consumers and businesses and Tokyo’s challenges in its search for sustainable price growth.Karaage-kun chicken nuggets からあげクンKey ingredients: Wheat flour, chickenPrice increase: 10 per centWhy does it cost more: Rise in raw materials, packaging and transport costsFor many, the reality of inflation hit home when Japanese convenience store chain Lawson increased the price of its karaage-kun chicken nuggets by 10 per cent to ¥238, the first price bump since the company’s best-selling product went on sale in 1986.Lawson blamed the higher price on the soaring cost of raw materials as well as packaging and transport. “We wanted to continue with the same price, but all the other price increases became unmanageable,” a spokesperson said.The war in Ukraine, a nation that is one of the biggest suppliers of wheat, sent global prices soaring and pushed up the cost of imported flour, which Japan depends on for roughly 90 per cent of its consumption.This has also made domestic wheat flour, which karaage uses, more expensive. The average auction price for this year is set to be about 30 per cent higher than a year earlier, according to the National Rice Wheat and Barley Improvement Association.Inflationary pressures are expected to continue. Data provider Teikoku Databank has forecast a price rise in more than 15,800 Japanese food items by April, with an average price increase of 16 per cent.Tofu 豆腐Key ingredient: SoyabeansPrice increase: Up to 10 per centWhy does it cost more: Rise in imported soyabean pricesEven after raising prices, Ryuji Yamaguchi, the 48-year-old head of a tofu maker in the northern island of Hokkaido, is struggling to cope and fears his customers will balk at another price rise this summer.Last year, Yamaguchi increased prices by up to 10 per cent to cover the rising cost of imported soyabeans, which the company relies on for 60 per cent of its tofu products.But with the price of imported soyabeans tripling since Yamaguchi joined his grandfather’s group in 2000, the company has continued to generate losses. “The price increase [last year] was a bare minimum for us to keep our business going,” said Yamaguchi, whose company supplies local supermarkets, schools and hospitals.Another issue on the horizon is higher wages. With the food industry under so much pressure, his employees are not expecting higher pay yet, Yamaguchi said, but for now he has tried to compensate by shortening working hours.Yamaguchi’s situation is symbolic of Japan’s broader struggle to create a cycle of rising wages, consumption and prices. “What global investors want to know the most at the moment is at what point does the BoJ finally believe that it is able to sustainably achieve its 2 per cent inflation target,” said Ayako Fujita, chief Japan economist at JPMorgan Securities. While large companies such as Toyota, Nintendo and Uniqlo owner Fast Retailing have increased pay, the country’s small and medium-sized companies have struggled to do so. Unlike the US, inflation in Japan’s services sector has been weak due to the lack of strong wage growth.“Uncertainty is high as to what extent wages will rise,” Junko Nakagawa, a BoJ policy board member, said in a speech this month. “If the behaviour and mindset based on the assumption that wages will not increase easily remain deeply entrenched, there is a risk that moves to increase wages will not strengthen as much as expected.”Toto’s Washlet bidet ウォシュレットKey materials: Resin, copper and electronic componentsPrice increase: Up to 8 per centWhy does it cost more: Rise in resin, copper and chip component pricesThe weaker yen, supply chain disruptions caused by Covid-19 and rising fuel and logistics costs have boosted consumer electronics prices across the board. The prices of items such as refrigerators, rice cookers, toasters and Sony’s PlayStation 5 gaming console have all risen in Japan, even if they have not elsewhere in the world.Inflation has also hit the bathroom, with Japan’s largest toilet maker Toto — which makes roughly $5bn in annual revenue — announcing in January that it planned to raise the price of its flagship Washlet bidet seat by up to 8 per cent from August. The 106-year-old company already raised bidet prices by up to 13 per cent last October.Following a pandemic panic over toilet paper shortages, sales of Toto’s electronic bidet shot up in the US and the company had difficulty procuring chip components. While this supply chain issue has been resolved, Toto has come under pressure from rising prices of materials such as resin and copper.“Because it’s Japan, Toto had to explain the efforts it is making to bring down costs in order for consumers to accept the price increase,” said Hiroki Kawashima, an analyst at SMBC Nikko Securities.

Toto has installed more robots to bring down manufacturing costs, but its efficiency drive has not been enough to offset the blow from soaring raw material prices.The challenge facing Ueda will be to ensure Japan does not fall back into deflation and that inflationary pressures do not spiral out of control. “Even if it was a result of an external shock, it’s a huge progress that people were able to confirm that prices and wages can go up in Japan. It’s a hard-won asset that Mr Ueda probably thinks he cannot lose,” said Tetsuya Inoue, a former BoJ official who worked as Ueda’s secretary and senior researcher at Nomura Research Institute. More

Chinese artificial intelligence groups are skirting export controls to access high-end US chips through intermediaries, revealing potential loopholes in Washington’s blockade of cutting-edge technology to the country.AI surveillance groups targeted by US sanctions have found ways to obtain restricted technology by using cloud providers and rental arrangements with third parties, as well as purchasing the chips through subsidiary companies in China. iFlytek, a state-backed voice recognition company blacklisted by Washington in 2019, has been renting access to Nvidia’s A100 chips, which are critical in the race to develop groundbreaking AI applications and services, according to two staffers with direct knowledge of the matter. Facial recognition group SenseTime, sanctioned at the same time as iFlytek, has used intermediaries to purchase banned components from the US, according to three senior employees familiar with the situation. Privately controlled cloud computing companies also provide access to high-end US chips. AI-Galaxy, a Shanghai-based cloud computing company founded by former employees from Nvidia and AliCloud, charges $10 for one-hour access to eight of its A100 Nvidia chips.The ability of Chinese AI groups to continue accessing Nvidia’s crucial high-end chips and other cutting-edge technology underlines the challenge the US faces in enforcing its trade restrictions against Chinese companies. Last October, Washington imposed unilateral export controls that barred US companies from selling advanced chipmaking equipment and high-end semiconductors including the A100 to Chinese groups, widening its trade restrictions from just specific blacklisted companies. “iFlytek can’t purchase the Nvidia chips, but it’s not a problem because it can rent them and train our data sets on other companies’ computer clusters,” said an executive familiar with the AI firm’s operations. “It’s like a car rental system. You can’t take the chips out of the facility. It’s a huge building with a computer cluster, and you buy time on CPUs [central processing unit] or GPUs to train the models,” the person said. While iFlytek cannot own the chips outright under US export controls, two employees said the rental system was a good, albeit more expensive, alternative. An engineer at iFlytek said the company “rents the chips and equipment on a long-term basis, which is effectively the same as owning them”. iFlytek was banned from directly buying these semiconductors after Washington blacklisted it for its alleged role in providing technology for state surveillance of Uyghur Muslims in Xinjiang. In some cases, SenseTime bought advanced chips directly through its own subsidiaries that are not on Washington’s “entity list”, according to three senior employees familiar with the situation. SenseTime said it “strictly complies with various domestic and foreign trade-related laws and regulations” and that the group had developed a programme to ensure it “meets trade compliance standards”.iFlytek did not respond to a request for comment. A US Commerce Department spokesperson said its Bureau of Industry and Security “vigorously investigates potential violations of export controls but does not comment on specific allegations”.An export control expert in Washington said US export regulations did not cover cloud providers, even if restricted chips were used. They added there was a violation only if the technology was harnessed to build weapons of mass destruction. Local governments in China rushed to help the industry stockpile high-end chips in advance of Washington unveiling severe export controls last October.One person close to iFlytek said the US export restrictions prompted the proliferation of state-backed computer clusters, which stockpiled Nvidia chips and rented out access of the technology to blacklisted companies. In addition, a government official in Zhejiang noted that “several places [local governments and companies] have built or are building AI computing centres, which provide cloud rental services for enterprises. This is part of the new infrastructure supported by the national policy.”“All AI companies use and stockpile advanced chips like Nvidia A100, including us,” said an engineer from SenseTime, adding: “We do our compliance and legal work very thoroughly and carefully.” “China’s AI industry faces huge risks because of US sanctions,” said one individual close to SenseTime. “We expect the US to impose more sanctions on Chinese AI firms, their suppliers and clients. We need to make sure our supply chain and sales remain steady,” the person added. Private cloud providers have seen soaring demand for Nvidia’s A100 chips, the same used in generative AI models such as OpenAI’s ChatGPT. An executive at a US tech giant in China said they continued to offer local companies access to cloud computing running on A100 chips and the offering had attracted a large number of start-ups trying to clone ChatGPT. The company’s US legal team was initially wary of continuing to offer cloud services running on A100s chips but ultimately decided it did not contravene export controls.

Even though US export controls do not explicitly ban access to the chips through cloud service providers, some companies are still taking measures to obscure their identity. An executive at a cloud services start-up in Shenzhen said they had seen demand for A100 chips surge from “strange” companies that masked their real identity behind shell companies. “Our counterparts told us that we should never get serious about finding out who’s behind them,” the executive said. Nvidia said that “while we can’t control every future use or downstream sale of our products, we require our distributors to follow all US export rules and sell only to appropriate commercial, consumer, and academic customers that use our products for beneficial purposes”.Additional reporting by Ryan McMorrow and Sun Yu in Beijing, and Tim Bradshaw in London More

WASHINGTON (Reuters) -When U.S. President Joe Biden rolls out his budget plans at a Philadelphia union hall on Thursday, he will highlight something that merited little mention during his last presidential campaign – a pledge to cut trillions from the government’s deficit.Biden ran in 2020 on putting money in people’s pockets and rebuilding the middle class, and the U.S. federal deficit wasn’t on a long list of campaign promises. But on Thursday, cutting nearly $3 trillion from the deficit over a decade, by raising taxes on companies and people earning over $400,000 a year, will be a topline goal, the White House says.Biden’s increasing emphasis on the deficit now doesn’t mean the White House sees an imminent crisis looming from the nation’s $32 trillion debt.Instead, the White House hopes to draw a sharp contrast with Republican threats to refuse to raise the debt limit without sharp spending cuts, aides and officials say. Including this fiscal plan in Biden’s agenda can help shore up his economic credibility before his expected 2024 re-election campaign, the White House believes.Taxing the rich and companies while maintaining Social Security, Medicare and Medicaid has widespread popular support, polls show. Hiking these taxes can help fix bedrock problems in the U.S. economy, Biden aides say.”We have a fundamental problem with our tax system, which does not support the kinds of investments and commitments that the American people demand and want and expect. And that’s largely because Republicans kept cutting taxes over and over again, primarily for people at the top and for big corporations,” said Michael Linden, executive associate director at the White House’s Office of Management and Budget.That doesn’t mean that what the White House is proposing is going to happen, of course. Congress’s lower chamber is controlled by Republicans who have said they want to demand sharp cuts on spending on Biden’s initiatives and extend tax breaks passed under Donald Trump. And while Americans tell pollsters they want higher taxes on the rich, hiking taxes is never a politically savvy move.”In 2023 and 2024, it is hard to see how any of the administration’s progressive tax proposals get done, but after 2025 is a different story if Democrats manage to get unified control of Congress back,” said Tobin Marcus, a former Biden economic aide and now an analyst for Evercore ISI, an investment bank.DO AMERICANS CARE ABOUT THE NATIONAL DEBT?The U.S. annual deficit was 5.4% of gross domestic product (GDP) last year, and the total debt stood above 120% of GDP, higher even than its levels at World War II peak. The federal government last turned an annual surplus, which is used to pay down the long-term debt, in 2001, and Democratic presidents have often been better at reducing the deficit. Nearly six in ten people told Pew Research Center in January that reducing the deficit should be a top Biden administration priority. But when asked whether the government should mostly cut services to lower the debt or increase taxes, Americans are closely divided. Half said they would mostly cut spending, while 46% would increase taxes, according to a Marist poll last month.Biden’s administration has treated the risk of deficits as more sanguine than was common among Democrats in years prior.”There has been a sea change in attitudes,” said Jason Furman, a Harvard University economics professor who was former President Barack Obama’s top economic adviser. It has less to do with shifting economic thought than finance, he said. “The bond markets aren’t very worried about debt and deficits.”Robert Reich, a former labor secretary during President Bill Clinton’s administration, said he did not believe the administration’s top economic officials he has worked with are “deficit hawks.”He said many had learned from the 2008-2009 global financial crisis, when the U.S. government didn’t spend enough to restore the economy and made no apologies about spending freely to prevent the same thing from happening in 2021.”It was also extremely important to get out of the pandemic recession,” he said.Biden aides believe deficits matter as a fiscal risk to the degree that they create unsustainable interest payments, discourage private sector spending and other investment, or distort the economy by increasing inflation. None of those are factors now when U.S. 10-year Treasury rates are below 4%, still low by historical standards. More