By: Dr. Mike Campbell
According to the old joke, if you owe the bank $25 000 you’ve got a problem; if you owe them $25 000 000, then they’ve got a problem. A projection just released for the debt situation facing Japan is that they could be in hock to the tune of
¥ 23 000 000 000 000 ($280 billion) by 2020, if things continue as they are. Compared to the size of its economy, Japan’s debts are the greatest in the industrialised world.
If the world’s financial markets were to lose confidence in Japan’s ability to honour its obligations, the consequences to the global economy would be catastrophic. The first consequence would be that the Yen would come under enormous pressure, mitigating the debt problem by depreciating it in real terms, but the knock-on effect to creditors abroad would be bankruptcy as their Yen denominated assets evaporate. Obviously, the Japanese need to take steps to ensure that this doomsday scenario never happens.
Japan's Future Challenges
The Japanese government has pledged to turn the enormous deficit into a surplus by 2020 – a snip as it means they only need to save a fraction over $28 billion every year for the next ten years to achieve it. Given that Japan has an aging population (equating to lower tax revenues and higher social security spending), is starting to feel the effects of a high Yen and is struggling with continued deflation and near record unemployment, this ambitious plan sounds like political rhetoric.
Japan is bound to face some unpalatable choices. The PM, Naoto Kan has suggested that consumption tax (sales tax) must rise from its current level of 5%. In the UK, a comparable tax (VAT) just rose to 20%. The PM’s suggestion was blamed for his party’s losing control of the upper house of the Japanese parliament. Ultimately, the cost of doing nothing will cease to be an option.