Monday, March 05, 2012

Japan is Not Greece

Japan’s public debt is fast approaching one quadrillion yen, a figure roughly equivalent to U.S. $14 trillion. It is a number that one does not often see outside of the science fiction. It is equivalent of a numeral one followed by twelve zeros.

The gross public debt is said to be equal to about 218 percent of gross domestic product, the heaviest in the world. Put another way, the debt is nearly equal to the $14 billion total indebtedness of the U.S. with but in a country with half of the gross domestic product  and 40 percent of the population.

In the coming year about 45 percent of the national budget will be covered through borrowing, a figure that has increased this year because of the imperative to raise money to help rebuild the regions devastated by last year’s earthquake and tsunami and compensate people injured in the Fukushima Daiichi nuclear plant crisis.

Yet there are no riots in the streets, no calls for international bailouts, no calls for belt-tightening, no draconian cuts in public services. On the  contrary, in the past year the Diet, as Japan’s bicameral parliament is called in the West, has passed three supplementary budgets all of which are covered by selling additional government bonds.

“I’m not worried,” says Eisaku Sakakibara serenely. The former vice minister at the Finance Ministry (the top civil servant) is now a professor at Aoyama University in Tokyo. His frequent comments on high finance has earned him the sobriquet “Mr Yen”.

Sakakibara is confident that Japan can avoid a debt crisis at least in a four-to-five year horizon. That should give Tokyo time to take necessary steps to ameliorate the situation. “The solution is very clear cut – raise taxes”, he says. In the meantime, continued domestic demand for government securities will cover deficits.
Recently Bloomberg published a short article under the simple heading:  0.94%  in huge letters. That represents the interest that the Japanese government now pays on 10-year government  bonds, the second lowest interest rate in the world, behind only Switzerland, but well ahead of Italy (7 per cent) and 35 per cent for Greece.

“The rate is so low as to suggest that if there is a real crisis in Japanese government finances, a lot of major investors have not noticed it,” says Eamonn Fingleton, author of several books on the Japanese economy, most recently In the Jaws of the Dragon.

He points out that much of the money the government borrows from Japanese savers goes to fund other governments’ spending, including that of the United States, Japan currently holds about $1 trillion in U.S. Treasury bonds, slightly behind those held by China.
Indeed only a couple years ago Tokyo had the wherewithal to loan $100 billion to the International Monetary Fund to help keep that institution afloat (even though the director continues to be a European). “The Japanese government is actually the world’s lender of last resort,” Fingleton argues.

Japanese saver have about 15 trillion yen stashed away in postal savings accounts, or more than the total combined borrowing of national and local governments. They can essentially finance whatever the government needs for a long time to come.

Roughly 95 percent of Japanese government bonds are said to be held by Japanese themselves, which is sort of like children borrowing from their parents (or perhaps the other way around) “It’s in the family,” says Fingleton. “There would be no net sacrifice in paying off the debt, as there would be in the U.S. or other debtor nation.”

Some pundits have gone so far as to argue that, in a pinch, the government would simply ask the bondholders to forgive their debt in the interests of the nation as a whole. In that case, the large borrowing might become simply another form of taxation, albeit one where the government pays the taxpayer a small amount of interest.

Fingleton warns against taking the Japanese debt numbers at face value. “The figures that are bandied about are not properly sourced.” he maintains. Moreover,  he says Tokyo has a long-time habit of putting out exaggerated stories about its economic problems -  helped along by the Western media’s incessant harping on the country supposed “lost decades” - because it helps fend off trade sanctions.

This is not to say that Japan has no fiscal problems. In 2011 Japan experienced its first trade deficit in more than 20 years. The deficit was, of course, more than offset by a healthy current account surplus based on returns on foreign investments. Was it a fluke, occasioned by natural disasters in Japan and Thailand, or a harbinger of things to come?

Prime Minister Yoshihiko Noda, a former finance minister, has made fiscal reform the main goal of his administration. Indeed, it is fair to say he is staking his government and the future of his party on the proposition that he can get a rise in the consumption (ie sales) tax through parliament this spring.

A five-percent consumption tax was first enacted in 1995, but has long been considered inadequate to meet the needs of an aging society and continue to cover the gaps in the costs of social security. Noda proposes to raise the tax incrementally to 10 percent by 2015.

Japanese are no more interested in paying higher taxes than anybody else, so it is not surprising that raising the consumption tax is kind of a “third rail” in Japanese politics. Former prime minister Naoto Kan proposed such a tax rise last year and lost the election to the upper house of parliament. His administration never really recovered.

“In the past there are few examples of a party raising the flag of a tax increase winning an election, but the cold truth is that this is the only way for Japan, with its quadrillion yen national debt ,to avoid its own ‘europe-ification’,” says Takao Toshikawa, chief correspondent for the Oriental Economist newsletter.

Public opinion polls show (surprise surprise) that about 60 percent of the public opposes raising the consumption tax, although a nearly equal number agree that something must be done. Noda has, in effect bet the future of his government and party on that the latter view will ultimately make itself felt as the bills move through parliament.


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