....Like Greece, Japan’s net debt is close to the 120pc of gross domestic product mark. The deficit is still climbing every year. The country’s credit rating has been cut again and again, leaving it far below AAA ranking. Its debt interest payments and refinancing costs account for over 20pc of its annual spending.
According to Shigeru Ishiba – MP and chairman of the policy research council of the opposition Liberal Democratic Party, a crisis is approaching.
“Gradually the Japanese government debt is closing in on the level of savings of the Japanese people,” he says. “So when the government debt goes beyond the level of total savings that will be the destruction of Japan. And I must say that that day may not be that far away.”
But people have been predicting an apocalypse for the Japanese budget for at least a decade, and year by year, the country has defied such warnings. The government has been able to sustain a textbook unsustainable level of debt because the debtholders have been willing to lend it money at interest rates of between 1pc and 2pc, compared with rates of over 4pc throughout much of Europe, and more than 6pc in Greece. And the reason those creditors have done so? Because 95pc of them are Japanese.
This peculiarity of Japanese government debt – that it is vastly owned by Japanese citizens – has protected it from the discipline that would be imposed by international investors. However, a growing number of experts think this buffer will soon come to an end. The savings rate in Japan, which stood at around 14pc in the early 1990s, is now below 4pc – one of the lowest in the OECD.
According to Naoyuki Yoshino, professor at Keio University, the country may have only four years until the stock of savings is overtaken by the supply of debt, meaning it will suddenly have to start selling a larger chunk of its debt to outside investors, potentially triggering a sharp increase in interest rates.
“When those rates start to rise, then we would have to slash government spending,” he says.
The flip-side is that although household savings are dropping, companies are still saving large amounts rather than investing. However, Naohiro Yashiro of Tokyo’s International Christian University, warns that either way, at some point even the Japanese may reconsider their faith in government bonds and diversify.
“Asset prices can be easily affected by many dimensions,” he says. “If the household sector wants to switch from government bonds to some other form of financial assets, that would affect the price and interest rate of the bonds.” ......Logic says that at some point investors will tire of the paltry return from Japanese bonds and will look for better value elsewhere.
Ultimately, the only way to reassure them will be for the government to show willingness to bring the Japanese public finances back in order.However, the newly-elected Democratic Party of Japan party has so far failed to acknowledge that such surgery may be necessary. It pledged in its manifesto not to raise taxes for its first term, but has also committed to a whole swathe of spending increases. The upshot is that the deficit is climbing even higher.
According to Goshi Hosono, one of the party’s rising stars, at some point Japan will have to consider raising taxes – most likely consumption tax, which at 5pc is far below European VAT levels. But politics prevents it, both because of its manifesto pledge and because the fledgling government is concerned about losing ground in the upper house elections this summer.
Still, the next flashpoint comes just before those polls, when the party unveils its long-term fiscal strategy. Whether it can reassure its investors that it will soon bring spending under control remains to be seen. The omens are not good. The DPJ has unseated the reigning LDP party for the first time in 50 years, but did so with promises to overhaul the civil service bureaucracy that has controlled Japan behind the scenes for that entire period. These were laudable aims, but the upshot is that much of the behind-the-scenes establishment is willing the DPJ on to fail – perhaps even at the cost of a fiscal crisis. ......
http://www.telegraph.co.uk/finance/financetopics/...ernment-debt.html |