By Paul Jackson
The Japanese Prime Minister has warned it could happen to the debt-ridden nation. Is Japan poised to be the next Greece?
Since taking office last month, Prime Minister Naoto Kan has dramatically shifted the focus of political and economic debate in Japan to the nation’s shocking finances.
Japan is in danger of financial collapse, Kan warned, as he called for a hike of the 5 percent consumption tax. Coming just before an important upper house election on Sunday, it was a bold move to touch a traditional ‘third rail’ of politics. And in doing so, he has turned the poll into something of a referendum on increasing the sales tax.
Broaching the subject has suddenly become possible in part because of the Greek debt crisis and its repercussions in the Eurozone and beyond. Scenes of public unrest in Greece on TV news shows and the rapid escalation in the scale of the bailouts needed by Athens have made the Japanese public more aware of the potential consequences of national debt problems.
And when it comes to debt, Tokyo has plenty of it. In fact, Japan has the highest proportion of outstanding debt in relation to GDP among major economies. The Ministry of Finance officially calculates Japan’s gross national debt in 2010 at 181 percent of GDP (though the latest figures suggest it’s closer to 200 percent), far in excess of the Eurostat figure for Greek national debt of 115 percent (2009). Meanwhile, to pay for this year’s 92.3 trillion yen budget, Japan needs to issue 44.3 trillion yen’s worth of new government bonds. That’s more than the 37.4 trillion yen it expects to raise from taxes for the year. Servicing the national debt now uses 22.4 percent of that budget, well in excess of spending on public works, education, science and defence spending combined.
Could Japan be the next Greece?
A glance at the figures suggests a real predicament for the government. But just how bad is Japan’s debt problem? Is Tokyo really in imminent danger of a financial meltdown similar to that of Athens? And if it does need to repair its finances, will raising the consumption tax be enough?
Economists and analysts suggest that while the Greek debt crisis has opened eyes in Japan and served as an important example of what can happen to a nation that turns a blind eye to its debt problems, there are important differences.
Takahira Ogawa, director of sovereign ratings at Standard & Poor’s, points out that Japan has the advantage of independent monetary policy unlike Greece, which is a member of the Eurozone. He also points out that Greece shot itself in the foot by possibly trying to ‘cook the books,’ fuelling a crisis in confidence. Ogawa said he can’t imagine Tokyo using derivatives to conceal its debt problem anytime soon.
Japan also has deep pockets, which means on paper at least it has the potential to pay off a lot of that outstanding debt.
‘The Japanese government has a lot of financial assets,’ Ogawa says. ‘Of course, the extent to which they can actually be used is a very serious question. But if you use the OECD or IMF’s definition, Japan’s net general government debt level is slightly less than 100 percent.’
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Ralph Sato
Ellen Brown has written a wonderful article in Asia Times about the Japan Post Bank. Recall that Koizumi Junichiro pushed for the privatization of the Postal System when he was prime minister. His real goal was to privatize the huge deposits of the postal system which amount to about three trillion dollars. One of the LDP legislators opposed to privatization was Kamei Shizuka. Koizumi forced Kamei out of the party for his disloyalty but after leaving the LDP Kamei formed his own small party. Koizumi put an economics professor from Keio University, Takenaka Heizo in charge of the privatization effort. Because of its size Takenaka set 2017 as the date when privatization would be completed. By a strange turn of events, Kamei’s party joined the DPJ coalition and was appointed to oversee the privatization of Japan Post Bank by the DPJ leadership. Kamei has managed to stop further efforts to privatize JPB and so the management of the bank will remain under bureaucratic control. This is great because now the huge funds under JPB management can be used in the reconstruction effort in the Tohoku region and in the huge efforts to reform the electricity industry.
Richard Bergovoy
One often hears the Japanese say that their 180+% debt to GDP ratio isn’t as serious as it sounds, because “we owe it to ourselves.”
This article is one of the most insightful, most accurate I’ve seen in English in explaining the Japanese debt crisis from the Japanese point of view, while also showing the bigger picture.
As the article explains, the “we owe it to ourselves” theory isn’t quite as delusional as it sounds, considering that the debt is almost entirely held by Japanese institutional investors that appear to be satisfied with near zero interest rates, and presumably would be more forgiving than foreign hedge funds if worse came to worse and the government had to restructure that debt. (I heard on a Japanese radio program that the government is trying to broaden the market for government bonds by rolling out an advertising campaign that claims that women are attracted to men who own Japanese government bonds!)
But with 22.4% of the government budget currently going to pay debt service, one wonders how long the numbers remain workable, especially if inflation boosts market interest rates. (However, Paul Krugman claims that the debt service figure should be calculated as closer to 14%, because Japanese government debt service figures combine interest payments on current debt with funds for repaying matured debt, i.e. principal. It would be interesting to know whether other economists agree with that assessment.)
Again, thank you for the well written, well researched article on an important but not well understood topic.
Skateman
Japan isn’t anything like Greece. Japan is the monopoly issuer of a flexible exchange rate currency. That means paying its “debts” is as easy as pressing the magical money making button. Greece does not have this advantage. The bigger long-term danger for Japan is that its massive deficits ultimately create massive inflation. Their population is old and getting older, eventually the government will be spending much, much more than the population is able to produce. As demand becomes greater and greater than supply, prices will rise.