Greece’s debt problems may be in the spotlight but Japan is walking its own financial tightrope, analysts say, with a public debt mountain bigger than that of any other industrialized nation.
Public debt is expected to hit 200 percent of GDP in the next year as the government tries to spend its way out of the economic doldrums despite plummeting tax revenues and soaring welfare costs for its aging population. Based on fiscal 2010 nominal GDP of 475 trillion yen ($5.09 trillion), Japan’s debt is about 950 trillion yen — or 7.5 million yen per person. Japan “can’t finance” its record trillion-dollar budget passed in March for the coming year as it tries to stimulate its fragile economy, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.
“Japan’s revenue is roughly 37 trillion yen and debt is 44 trillion yen in fiscal 2010,” he said. “Its debt-to-budget ratio is more than 50 percent.” Without issuing more government bonds, Japan “would go bankrupt by 2011,” he added. Despite crawling out of a severe year-long recession in 2009, Japan’s recovery remains fragile, with deflation, high public debt and weak domestic demand all concerns for policy makers.
Japan was stuck in a deflationary spiral for years after its asset price bubble burst in the early 1990s, hitting corporate earnings and prompting consumers to put off purchases in the hope of further price drops. Its huge public debt is a legacy of massive stimulus spending during the economic “lost decade” of the 1990s, as well as a series of pump-priming packages to tackle the recession that began in 2008.
Standard & Poor’s in January warned that it may cut its rating on Japanese government bonds, which could increase Japan’s borrowing costs amid faltering efforts by the government of Prime Minister Yukio Hatoyama to curb debt. The system of Japanese government bonds being bought by huge institutions such as Japan Post Bank has been key in enabling the country to remain buoyant since its 1990 stock market crash.
“Japan’s risk of default is low because it has a huge current account surplus, with the backing of private-sector savings,” to continue purchasing bonds, said Katsutoshi Inadome, bond strategist at Mitsubishi UFJ Securities. But while Japan’s risk of a Greek-style debt crisis is seen as much less likely, the event of risk becoming reality would be devastating, say analysts who question how long the government can continue its dependence on issuing public debt.
“There is no problem as long as there are flows of money in the bond market,” Kumano said. “It’s hard to predict when the bond market might collapse, but it will happen when the market judges Japan’s ability to finance its debt is not sustainable. And when that happens, the yen will plummet and a capital flight from Japan’s government bonds to foreign bonds will occur.”
Yet others argue that there is no precedent for the ratio of debt to GDP nearing 200 percent being dangerous. Nomura Securities economist Takehide Kiuchi cited Britain’s government debt in the post-war period “which reached 260 percent but the government didn’t face a debt crisis.” “There is no answer to the question of what the critical level of debt is for a government to go bust,” he said. The likes of single-currency Greece and non-euro zone countries were also different in that the latter group had flexible currency exchange rates that were more closely calibrated to their fiscal conditions, Kiuchi said.
The most realistic hazard brought by huge Japanese debt is prolonged deflation in a shrinking economy, analysts say. “Regaining fiscal health needs fiscal austerity, which could weigh on economic growth,” Kiuchi said. “And when the economy is bad, people don’t spend money as they are worried about their future, which in turn intensifies the deflation trend.” Continued deflation could further worsen Japan’s fiscal health because of less tax revenue and more stimulus spending, stirring fears over big tax rises, which in turn weigh on demand and again reinforce deflation, analysts said.
The key to breaking the vicious cycle was drafting a feasible economic growth strategy. “If the economy grows, tax revenue increases,” Kumano, of Dai-ichi Life, said. Since 2001, Japan’s annual growth rate peaked at 2.7 percent in 2004. The economy shrank 1.2 percent in 2008 and 5.2 percent last year.
Hatoyama’s center-left government has pledged to announce details of its new strategy in June, which aims to lift annual growth to 2 percent by focusing on the environment, health,
tourism and improved ties with the rest of Asia. By Kyoko Hasegawa for Agence France Presse
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