Should the bill not be enacted by the end of November, the government has warned it will run out of cash, prompting warnings from credit-rating agencies of another downgrade in Japan’s sovereign debt rating as well as volatility in the bond market.
Meanwhile, an aging population, declining birthrate and a contracting workforce are putting pressure on household savings, adding to concerns that the nation’s legendary savers will no longer be able to buy government bonds.
According to a McKinsey study, savings rates in Japan decline markedly after the age of 50, meaning that the rising proportion of elderly will further diminish household savings.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
In addition, the cost of increased energy imports to cover the shutdown of nuclear power plants has eroded the trade balance. Exports to Japan’s biggest trading partner, China have been hit by a slowdown that may mark the end of double-digit growth in the Middle Kingdom.
In its August 2012 report, the IMF warned that “even a moderate rise in yields would leave the fiscal position extremely vulnerable…Failure to implement a credible fiscal consolidation plan could lead to sovereign downgrades and trigger similar actions for financial institutions, which could eventually erode confidence in the JGB [Japanese government bond] market.”
Higher JGB yields would further damage public finances, with the government’s budget already at a point where bond issuance exceeds taxation revenues. The IMF calculates that a spike in bond yields would slash output by 6 to 10 percent over 10 years, potentially harming not only other Asian economies but also the United States and Eurozone.
Despite the highest public debt to GDP ratio in the industrialized world, Japan remains the world’s biggest creditor with net foreign assets of around US$3.1 trillion, with its 2011 per capita GDP of US$34,294 above Italy, Spain and South Korea and four times the size of China’s.
Household assets of an estimated 1,500 trillion yen, surplus funds held by the private sector and the demand from Japanese banks and other financial institutions for low-risk investments have given the government a ready market for its JGBs.
In addition, Japan’s low ratio of taxes to national income provides scope for increasing the burden. According to OECD data, Japan’s 27.6 percent ratio in 2010 compared with the United Kingdom’s 35 percent and was below the average 33.8 percent of tax revenue as a percentage of GDP.