Greece’s debt problems may currently 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 ageing population.
Based on this year’s nominal GDP of ¥475 trillion (US$5.1 trillion), Japan’s debt is estimated to reach around ¥950 trillion — or roughly ¥7.5 million per person.
Japan “can’t finance” its record trillion-dollar budget passed last month 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 and debt is ¥44 trillion 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 last year, Japan’s recovery remains fragile with deflation, high public debt and weak domestic demand all concerns for policymakers.
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 which began in 2008.
Standard & Poor’s in January warned that it might cut its rating on Japanese government bonds, which could raise Japan’s borrowing costs amid the faltering efforts of Japanese Prime Minister Yukio Hatoyama’s government to curb debt.
The system of Japanese government bonds being bought by institutions, such as the huge Japan Post Bank, has been key in enabling Japan to remain buoyant since its stock market crash of 1990.
“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.
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 would happen when the market judges that Japan’s ability to finance its debt is not sustainable anymore.”
“And when that happens, the yen will plummet and a capital flight from Japan’s government bonds to foreign bonds will occur,” he said.
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.
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