NEWS AND COMMENTARY
October 27, 2000
Japan's Debt Mountain
By Gillian Tett, excerpted from The Financial Times
Japan On The Brink Of Economic Disaster ... Weiss comments
TOKYO - A decade ago Japan's vast wealth inspired awe. During the 1980s private savings rose to an estimated Y1,200,000bn ($11,000bn). Today Japan is setting records again - this time for public debt. By the end of the year, it is forecast that the government will owe about Y650,000bn, or 130 per cent of gross domestic product. Such a figure would be the highest level in the industrialized world, and twice the ratio of a decade ago, before Japan fell into economic stagnation.
One might imagine that the financial markets would be getting worried. To fund the government's spiraling debt, the ministry of finance this week raised its monthly 10-year bond issue from Y1,400bn to Y1,600bn. But the bond markets barely blinked. At yesterday's close, 10-year bonds were yielding a mere 1.85 per cent, the lowest rate among Group of Seven industrial countries. This suggests that demand is able to keep pace with the growing supply of debt and that investors still consider Japanese bonds to be low-risk.
For an economy battered by bad news in recent years, this result comes as a deep relief. It is also to be welcomed by other G7 countries, given that Japan's outstanding debt now equals more than 10 per cent of global GDP. Jitters over Japanese bonds could destabilize global markets.
But how long can this calm continue? While other countries, such as Italy, have touched similar debt ratios, 130 per cent usually marks the peak of their problem. In Japan's case, given the current deflationary climate, low growth and rapidly ageing population, the worst may be yet to come.
According to the Organization for Economic Co-operation and Development, the debt ratio could reach 150 per cent by 2004. Economists such as David Asher of the American Enterprise Institute, a US think-tank, believe 220 per cent is more likely. And even if a "mere" 150 per cent figure is assumed, history shows that few countries emerge from such indebtedness without experiencing default, devaluation, high inflation or some other economic crisis.
"By all conventional indicators, Japan has breached the boundaries of sustainable fiscal policy," warns Mr. Asher. "All other countries that have experienced similar balance sheet deterioration have eventually experienced a funding crisis."
What makes Japan's position so unusual - and the markets so hard to interpret - is that the country still has the largest pool of private savings in the world. This means that it has become one of the first countries to be able to fund nearly all its debt from within its own borders. A mere 5% of government bonds is held by foreign investors, far lower than in other G7 countries. So as long as Japan's savers keep buying bonds, a debt burden of 130 or even 200 per cent will not create a crisis. But if that changes, the consequences could be devastating.
"The issue is whether the Japanese people will have faith in their own government," admits one senior G7 official. "This is basically about confidence."
The strength in government bonds is the last thing keeping the ailing Japanese economy afloat. But that could change overnight. The yen could weaken enough to prompt investors to move money overseas. Higher inflation could also spur an exodus of money from Japan. A more likely scenario would be that Japan slips into a depression and investors lose confidence in the government's ability to pay back the borrowed money.
Meanwhile, the government claims that, as Japan's economy recovers, the country will "grow its way out of debt." The problem is the economy shows no signs of recovering, with a continuing meltdown in the stock market, failing insurance companies, banks on the edge of collapse, and reform measures on hold. Plus, Japan overstates its assets significantly. So, any real growth in GDP probably won't be enough to get out of debt.
In fact, even as economists predict 2% growth for Japan, the cost of servicing the debt is steadily rising, which means that Japan is sinking further and further into debt as the interest builds. Japan's debt burden is nearly unbearable already. If it continues to grow, Japan's economy won't come out of its depression anytime soon.
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