Nowhere is the epic stoicism of the Japanese more evident than in their approach to a mountain of public debt that leaves government finances in a perilous state. Eclipsing the debt load of Greece, not to mention the advanced economies, Japan has the granddad of government debt at $11 trillion, which amounts to a debt-to-gross domestic product ratio that exceeds 200 percent. A policy board member of Japan‘s central bank was right to warn last month that his country is not immune to a sovereign debt crisis. To draw a parallel, the debt is like the ballooning of the weakened walls of an ageing blood vessel -- a ticking time bomb that the body politic appears oblivious to.
Global capital markets are also unfazed by the mountainous debt because over 90 percent of Japanese government bonds are owned by its own people, compared to Greece where over 90 percent of debt is owed to foreigners. But funding of government borrowing by domestic savers cannot continue indefinitely. As noted by observers, a greying population is taking Japan to the next stage where a switch in focus from savings accumulation to net drawdown is inevitable.
For now, no warning bells are going off because Japan remains a creditor nation. Thanks to a net annual surplus of funds from overseas, comprising mainly dividends and interest from some 250 trillion yen in external assets, Japan’s current account remained in the black last year despite the logging of a trade deficit for the first time in 48 years. Without this giant nest egg, Japan might have already joined the ranks of debtor nations. The worry is that Japan‘s trade deficit may worsen -- the result of falling exports due to its companies shifting production overseas, and the effect of a high yen which makes Japanese products less competitive globally.
Amidst all this, it’s hard for outsiders to understand why Japanese politics remains dysfunctional. Prime Minister Yoshihiko Noda‘s proposed national sales tax to pay rising medical and pension benefits -- the consequence of a rapidly ageing society -- might well be blocked by the opposition in the hope of forcing early polls. If necessary change is once again stymied, it will only end up delaying much-needed reforms to the political, tax and social security systems that have contributed to the debt mountain. Having lost 20 years already since its property and stock market bubbles burst, Japan cannot afford to drag its feet any longer. --Ed.
