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.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
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.’