Forget Europe: Is the Real Debt Crisis in Japan?
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Forget Europe: Is the Real Debt Crisis in Japan?

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Predictions of the date may differ, but the general consensus on Japan remains the same. In a matter of just three to 10 years, the world’s third-biggest economy may start running out of the savings needed to fund its massive public debt.

Is it time to start selling yen, or are the doomsayers off target concerning the world’s biggest creditor nation?

The days of Tokyo’s finance mandarins being admired for their fiscal prudence are long since gone.

According to the International Monetary Fund, Japan’s general government debt first broke above 100 percent of gross domestic product (GDP) in 1997 as the authorities tried to pump prime the economy out of its post-bubble funk.

Ending the credit binge – and its famous “bridges to nowhere” construction projects – has proved challenging for governments dealing with a deflationary downturn, rising welfare costs and dwindling tax revenues.

In 2011, general government gross debt totaled nearly 230 percent of GDP and is projected to reach 245 percent in 2013, with the government’s fiscal deficit currently around 10 percent of GDP.

Net public debt, which subtracts from gross debt government assets such as public pension funds, has also increased tenfold over the past two decades to reach more than 125 percent of GDP.

In comparison with Europe’s indebted economies, Greece reached crisis point with its debt to GDP ratio of just 150 percent, while the Spanish government has faced a storm with a debt ratio below 100 percent.

Prime Minister Yoshihiko Noda, the first leader since Ryutaro Hashimoto in 1997 to raise the sales tax – Hashimoto’s move cost him his job – has already sounded the alarm.

“The European debt crisis is definitely becoming something that is not just someone else’s problem,” Noda has said. “We’re aware that it’s an urgent situation and want to explain that properly to our countrymen.”

Despite the urgings of economists and finance bureaucrats, it took a bruising political battle for Noda to succeed in pushing through a consumption tax hike seen as barely containing projected growth in welfare spending.

The increase in the consumption tax to 8 percent in April 2014 and 10 percent in October 2015 received approval in August, but Noda was forced to pledge to call fresh elections “in the near term,” a vow that the opposition has used to block a key debt issuance bill in hope of forcing elections by year-end.

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